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GUILTY UNTIL PROVEN INNOCENT? 

A STUDY OF THE PROPRIETY AND LEGAL 

AUTHORITY FOR THE JUSTICE DEPARTMENT’S 

OPERATION CHOKE POINT 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

REGULATORY REFORM, 

COMMERCIAL AND ANTITRUST LAW 

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

JULY 17, 2014 

Serial No. 113–114 

Printed for the use of the Committee on the Judiciary 

( 

Available via the World Wide Web: http://judiciary.house.gov 
(II) 

COMMITTEE ON THE JUDICIARY 

BOB GOODLATTE, Virginia, Chairman 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

LAMAR SMITH, Texas 

STEVE CHABOT, Ohio 

SPENCER BACHUS, Alabama 

DARRELL E. ISSA, California 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio 

TED POE, Texas 

JASON CHAFFETZ, Utah 

TOM MARINO, Pennsylvania 

TREY GOWDY, South Carolina 

RAU ́ L LABRADOR, Idaho 

BLAKE FARENTHOLD, Texas 

GEORGE HOLDING, North Carolina 

DOUG COLLINS, Georgia 

RON DeSANTIS, Florida 

JASON T. SMITH, Missouri 

[Vacant] 

JOHN CONYERS, JR., Michigan 

JERROLD NADLER, New York 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

STEVE COHEN, Tennessee 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

PEDRO R. PIERLUISI, Puerto Rico 

JUDY CHU, California 

TED DEUTCH, Florida 

LUIS V. GUTIERREZ, Illinois 

KAREN BASS, California 

CEDRIC RICHMOND, Louisiana 

SUZAN DelBENE, Washington 

JOE GARCIA, Florida 

HAKEEM JEFFRIES, New York 

DAVID N. CICILLINE, Rhode Island 

SHELLEY HUSBAND, Chief of Staff & General Counsel 

PERRY APELBAUM, Minority Staff Director & Chief Counsel 

SUBCOMMITTEE ON REGULATORY REFORM, COMMERCIAL AND ANTITRUST LAW

SPENCER BACHUS, Alabama, Chairman 

BLAKE FARENTHOLD, Texas, Vice-Chairman 

DARRELL E. ISSA, California 

TOM MARINO, Pennsylvania 

GEORGE HOLDING, North Carolina 

DOUG COLLINS, Georgia 

JASON T. SMITH, Missouri 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

SUZAN DelBENE, Washington 

JOE GARCIA, Florida 

HAKEEM JEFFRIES, New York 

DAVID N. CICILLINE, Rhode Island 

DANIEL FLORES, Chief Counsel 
(III) 

C O N T E N T S 

JULY 17, 2014 

Page 

OPENING STATEMENTS 

The Honorable Spencer Bachus, a Representative in Congress from the State 

of Alabama, and Chairman, Subcommittee on Regulatory Reform, Commercial and Antitrust Law ........................................................................................ 1 

The Honorable Henry C. ‘‘Hank’’ Johnson, Jr., a Representative in Congress 

from the State of Georgia, and Ranking Member, Subcommittee on Regulatory Reform, Commercial and Antitrust Law ................................................. 2 

The Honorable Bob Goodlatte, a Representative in Congress from the State 

of Virginia, and Chairman, Committee on the Judiciary ................................. 4 

WITNESSES 

The Honorable Stuart F. Delery, Assistant Attorney General, Civil Division, 

U.S. Department of Justice 

Oral Testimony ..................................................................................................... 17 

Prepared Statement ............................................................................................. 20 

Adam J. Levitin, Professor of Law, Georgetown University Law Center 

Oral Testimony ..................................................................................................... 122 

Prepared Statement ............................................................................................. 125 

Scott Talbott, Senior Vice President of Government Affairs, The Electronic 

Transaction Association 

Oral Testimony ..................................................................................................... 138 

Prepared Statement ............................................................................................. 140 

David H. Thompson, Managing Partner, Cooper & Kirk, PLLC 

Oral Testimony ..................................................................................................... 151 

Prepared Statement ............................................................................................. 153 

Peter Weinstock, Partner, Hunton & Williams LLP 

Oral Testimony ..................................................................................................... 168 

Prepared Statement ............................................................................................. 171 

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

Material submitted by the Honorable Spencer Bachus, a Representative in 

Congress from the State of Alabama, and Chairman, Subcommittee on 

Regulatory Reform, Commercial and Antitrust Law ........................................ 8 

Material submitted by the Honorable Doug Collins, a Representative in Congress from the State of Georgia, and Member, Subcommittee on Regulatory 

Reform, Commercial and Antitrust Law ............................................................ 27 

Material submitted by the Honorable Henry C. ‘‘Hank’’ Johnson, Jr., a Representative in Congress from the State of Georgia, and Ranking Member, 

Subcommittee on Regulatory Reform, Commercial and Antitrust Law .......... 30 

Material submitted by the Honorable Darrell E. Issa, a Representative in 

Congress from the State of California, and Member, Subcommittee on Regulatory Reform, Commercial and Antitrust Law ................................................. 80 

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Prepared Statement on behalf of the Virginia Bankers Association ................... 187 
Page

IV 

Prepared Statement of the Community Financial Services Association of 

America ................................................................................................................. 191 

Prepared Statement of the Independent Community Bankers of America 

(ICBA) ................................................................................................................... 196 

Prepared Statement of Marsha Jones, President, Third Party Payment Processors Association (TPPPA) ................................................................................. 198 

Questions for the Record submitted to Honorable Stuart F. Delery, Assistant 

Attorney General, Civil Division, U.S. Department of Justice ......................... 207 

Questions for the Record submitted to Adam J. Levitin, Professor of Law, 

Georgetown University Law Center ................................................................... 209 

Response to Questions for the Record from Scott Talbott, Senior Vice President of Government Affairs, The Electronic Transaction Association ............. 210 

Questions for the Record submitted to David H. Thompson, Managing Partner, Cooper & Kirk, PLLC ................................................................................... 213 
(1) 

GUILTY UNTIL PROVEN INNOCENT? 

A STUDY OF THE PROPRIETY AND 

LEGAL AUTHORITY FOR THE JUSTICE 

DEPARTMENT’S OPERATION CHOKE POINT 

THURSDAY, JULY 17, 2014 

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON REGULATORY REFORM, 

COMMERCIAL AND ANTITRUST LAW

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 9:34 a.m., in room 

2141, Rayburn House Office Building, the Honorable Spencer Bachus (Chairman of the Subcommittee) presiding. 

Present: Representatives Bachus, Goodlatte, Issa, Marino, Holding, Collins, Smith of Missouri, Johnson, Garcia, and Jeffries. 

Staff Present: (Majority) Daniel Huff, Majority Counsel; Ashley 

Lewis, Clerk; Justin Sok, Legislative Assistant to Rep. Smith of 

Missouri; Philip Swartzfager, Legislative Director to Rep. Bachus; 

Jaclyn Louis, Legislative Director to Rep. Marino; Ellen Dargie, 

Legislative Assistant to Rep. Issa; Jon Nabavi, Legislative Director 

to Rep. Holding; (Minority) Slade Bond, Counsel; and Veronica 

Eligan, Professional Staff Member. 

Mr. BACHUS. Good morning. The Subcommittee on Regulatory 

Reform, Commercial and Antitrust Law hearing will come to order. 

Without objection, the Chair is authorized to declare recesses of 

the Committee at any time. 

I am going to recognize myself for an opening statement. 

Let me welcome everyone to today’s oversight hearing on the 

Justice Department’s Operation Choke Point program. 

This Subcommittee has the duty of overseeing the Civil Division 

of the Justice Department, and today’s hearing is part of fulfilling 

that important function. 

By way of introduction, I approach this issue as not just a Subcommittee Chair on the Judiciary Committee, but as Chairman 

emeritus and former Chairman of the Financial Services Committee. 

So this is a matter I have been following closely across both Committees for some time, as have Members on both sides of the aisle, 

including Congress Blaine Luetkemeyer from Missouri, who has 

done a lot of work and study on this program. 
2 

The intent of Operation Choke Point may have carried a purpose 

that we would all agree with, and that is to prevent financial 

fraud. However, my continued concern is that the program threatens to dry up legitimate sources of credit and financing. 

Those left on the short end can often be the people who have the 

greatest difficulty in getting any credit at all. The program also can 

deny legitimate merchants access to financial networks they need 

to survive. 

In this economy, the last thing we need is to make it harder for 

businesses to operate and employ workers, and by that I mean legitimate businesses. 

Merchants that have been targeted by Operation Choke Point 

have not uniformly been called predatory lenders, as one might 

have presumed, but are a wide range of businesses, including coin 

dealers, firearms merchants, home-based charities, fireworks sellers, and even online dating services. That is a wide—very wide net. 

And one thing it immediately suggests is agency overreach. 

To date, the Justice Department has served more than 50 administrative and investigative subpoenas on banks. Subpoenas are very 

expensive to comply with and can bring unwanted scrutiny. 

So the natural reaction of a financial institution might be simply 

to sever a connection with a particular merchant and be done with 

it. 

By forcing that kind of decision, a government agency is able to 

achieve a particular policy goal without touching the ball, to use a 

sports term. It strikes me that someone’s due process rights are 

likely being violated. 

We have heard the Department of Justice and the relevant bank 

regulators say that the goal of Operation Choke Point is not to 

eliminate businesses that might—that some might deem politically 

problematic. 

However, after reviewing this issue, I am concerned that internal 

DoJ documents have revealed that, at a minimum, there have been 

an indifference to the risks that this policy poses to legitimate and 

lawful commerce. 

Our witness today—in fact, we have a memo from Assistant Attorney General Delery that acknowledges—and let me quote from 

that—‘‘the possibility that banks may stop doing business with legitimate lenders,’’ but concluded—and I will quote again—‘‘that 

solving that problem, if it exists, should be left to legitimate lenders themselves who can present sufficient information to banks to 

convince them that they are wholly legitimate.’’ 

That sounds like guilty until proven innocent. 

Again, this is a program that I have followed with increasing 

concern. Last August I wrote Attorney General Eric Holder and 

FDIC Marty Gruenberg, asking both agencies to immediately stop 

any actions designed to pressure banks and payment processors to 

terminate business relationships with lawful lenders. 

The fact that we are holding this hearing shows that there are 

many serious concerns that have yet to be satisfactorily addressed. 

With that, let me again thank our witness for appearing today. 

And let me yield to the Ranking Member for his opening statement. 

Mr. JOHNSON. Thank you, Mr. Chairman. 
3 

Ordinary people, mostly minorities, mostly African-Americans, 

are being squeezed every day by the justice system. 

They are sometimes prosecuted on shoddy evidence. They are coerced to accept unfair and unjustified plea bargains offered by prosecutors with unchecked and unbridled discretion. 

And they are punished if they don’t accept the plea and go to 

trial and get found guilty. They are threatened by these vindictive 

mandatory minimums, additional charges, and enhanced consecutive counts. So they plead guilty and still get a steep sentence. 

They are serving these steep sentences in overcrowded prisons in 

a country with the largest known prison population in the world. 

And, for many, an incarceration practically becomes a life sentence 

due to the shortage of second chances for criminal offenders. 

This is the state of our criminal justice system as it applies to 

ordinary folks, usually those from communities of color and without 

means. It is a system known as the new Jim Crow. 

In the 4 years since Dodd-Frank, not one single person who facilitated or contributed to the greatest financial crisis since the 

Great Depression has been prosecuted. Not one person has been 

held accountable for this immeasurable hardship through a public 

trial in the criminal justice system. 

Not one person has served as an example to those who would 

prey upon vulnerable members of society, including low-income minorities and the elderly, targeted with predatory loans which were 

then packaged and sold on Wall Street. And when they became 

nonperforming loans, these securities became worthless. Thus, the 

crash back in 2007. 

And all of this taking place at a time when the United States Supreme Court, our activist Supreme Court, is bestowing corporations, rewarding corporations, with the rights that people have. 

Citizens United. The First Amendment right to freedom of speech 

has been conferred upon corporations. 

And now with the Hobby Lobby decision, we have corporations 

with a religious right, a First Amendment right to freedom of religion to practice their religion. 

But I know of no corporation that has gone to church and paid 

tithes, listened to the sermon, and went out and acted like a Christian. 

I know of no corporation that has ever been to jail for operations 

on Wall Street or for—or Main Street. No corporation has ever 

been placed in jail. But, yet, they have the same rights that we 

have. 

Earlier this week the Department of Justice announced a settlement with Citigroup based on its misrepresentations about the inherent risks of sub-prime mortgages and other egregious behavior. 

This settlement includes a $4-billion penalty under the Financial 

Institutions Reform, Recovery and Enforcement Act, also known as 

FIRREA, F-I-R-R-E-A. Passed in the wake of the savings and loan 

crisis in the 1980’s, FIRREA is a critical tool in uncovering and 

prosecuting illegal conduct. 

In today’s oversight hearing, this Subcommittee will consider the 

propriety and legality, the propriety and legality, of Operation 

Choke Point, which is the formal name for a series of investigations 

by the Justice Department’s Civil Division under FIRREA of banks 
4 

that knowingly facilitate fraud that, in turn, affects the banks 

through unauthorized debits of consumers’ accounts and other illegal activity. 

Some of my Republican colleagues have disparaged these investigations under the theory that they enable the party in power to 

destroy businesses it favors without proof of wrongdoing. 

But let’s review the facts. The Justice Department has filed just 

one complaint against a financial institution as a result of Operation Choke Point. One. 

In this lawsuit, the Justice Department alleged that Four Oaks 

Bank knowingly provided direct access to the financial system to 

parties engaged in defrauding consumers and illegal activities, 

such as a Ponzi scheme, illegal online gaming, and unlawful lending. 

This bank not only permitted unlawful actors to directly access 

the financial system, it is alleged, it is also alleged that this bank 

allowed these parties to remove funds directly from consumers’ accounts even after receiving thousands of complaints from consumers that these debits were unauthorized. 

In fact, at one point, the bank stopped keeping track of consumer 

complaints altogether, illustrating its willingness to overlook fraudulent activity. In return for knowingly facilitating fraud, this bank 

received $850,000 in gross fees from a third-party processor. 

Again, this is the only civil complaint filed by the Justice Department, and it was settled within days without going to trial and 

without any prosecution—criminal prosecution for actual fraud. 

Instead of thanking the Justice Department for protecting untold 

consumers and the broader financial system from fraud, my Republican colleagues have hurled unfounded accusations, accusing public servants of abusing their power to destroy businesses that they 

simply dislike. 

Although I am dumbfounded by this argument, one thing remains clear to me. For House Republicans, banks are still too big 

for regulations, too big for trial, too big to fail, to big for jail, too 

big to even investigate for fraud and money laundering, and too big 

to be held accountable for defrauding Americans. 

I thank the Justice Department for fighting on behalf of consumers, and I encourage you to continue its investigations. 

And I yield back. 

Mr. BACHUS. Thank you, Mr. Johnson. 

At this time I recognize the Chairman of the full Committee, Mr. 

Goodlatte, for his opening statement. 

Mr. GOODLATTE. Mr. Chairman, thank you very much, and thank 

you for holding this hearing. 

There is no dispute that consumer fraud is a real phenomenon. 

Approximately 10.8 percent of American adults fell victim to it in 

2011. The Department of Justice should enforce the law vigorously 

on the villains who prey on our most vulnerable. 

There is also no dispute that Operation Choke Point is cutting 

off some fraudster access to the banking system. The bipartisan 

concern is that there is an unacceptable level of collateral damage. 

On this point, there appears to be a disconnect between statements from top officials and what is happening in practice. The of-
5 

ficial line is that Operation Choke Point is targeting fraudsters, not 

the whole industry. 

But the Committee has received numerous reports of banks severing relationships with law-abiding customers from legitimate industries that the Administration has designated ‘‘high risk.’’ 

For example, the Committee obtained a jarring account of a 

meeting between a senior FDIC regulator and a banker contemplating serving a payday lending client. 

The official told the banker, ‘‘I don’t like this product and I don’t 

believe it has anyplace in our financial system. Your decision to 

move forward will result in an immediate unplanned audit of your 

entire bank.’’ 

This sounds more like strong-arming than law enforcement. It is 

naive to answer that the government is merely requiring banks to 

pay heightened attention to these clients, not disallowing them. 

That is not how the system works in practice. 

Banks are highly regulated entities. They are at the mercy of 

their regulators, and that makes them risk-averse. To banks, highrisk merchants often are simply not worth the heightened scrutiny. 

This thinking is so prevalent in the industry that it has been 

given a name: De-risking. The chairman of the Office of the Comptroller of the Currency lamented in a recent speech, ‘‘And whether 

or not DoJ intended it, it now seems clear that de-risking is occurring and wiping out legitimate business.’’ 

The Department of Justice can no longer claim this consequence 

is unintended. It allows Choke Point to continue without changes. 

I also question the Justice Department’s legal authority to pursue this dangerously overbroad program. The Financial Institutions 

Reform, Recovery and Enforcement Act is one of the few statutes 

that gives the Department authority to issue administrative, investigative subpoenas in the civil context. 

Congress granted this authority in the wake of the savings and 

loan scandal to prevent fraud against banks. It applies to fraud affecting a Federally insured financial institution. Consumer fraud 

was not the focus. 

Nevertheless, the Department of Justice relies on a recent district court case interpreting ‘‘affecting’’ broadly. In that case, 

though, the bank was perpetrating the fraud. 

The district court, moreover, was careful to mention that the effects must be sufficiently direct and that there might come a point 

at which the effects on the bank are too attenuated. 

Such is the case with Operation Choke Point. It targets banks 

neither as victims nor as perpetrators. Instead, it is manipulating 

banks whose payment processor clients have merchant clients who 

may or may not defraud their customers. 

Accepting DoJ’s legal authority requires one to believe that by 

‘‘affecting’’ Congress meant to include fraud that was perpetrated 

not on banks and not even on their customers, but on the customers of their customers’ customers. 

Similarly, the reputational risk is not analogous. In the Department of Justice’s precedent, the bank was accused of cheating its 

own customers, which obviously drives away customers who do not 

want to be their own bank’s next victim. 
6 

By contrast, direct customers of banks targeted by Choke Point 

have no such concerns. Their bank is not defrauding them. The alleged problem is far removed from them and lies with the customers of their bank’s clients’ clients. In this setting, the prospect 

for reputational risk is highly attenuated, and DoJ’s interpretation 

again appears highly strained. 

Many of the concerns I have shared are bipartisan. A Democratic 

colleague told the Administration he wants to be sure we do not 

throw out the baby with the bathwater by shuttering lawful businesses. On March 27, 2013, 11 Democrats and 12 Republicans 

wrote banking regulators expressing a similar concern. 

Good law enforcement is hard work and time-consuming. There 

are no shortcuts. Officers have to do the difficult work of identifying bad actors individually. They simply cannot profile entire industries. 

I welcome Assistant Attorney General Delery, and I want to 

know what he makes of the devastating collateral damage to which 

some of our other participants will bear witness. 

I also welcome all of our other witnesses and look forward to the 

discussion. 

Thank you, Mr. Chairman. 

Mr. BACHUS. Thank you. 

Before I introduce Assistant Attorney General Delery—it is 

‘‘Delery?’’ 

Mr. DELERY. ‘‘Delery,’’ Mr. Chairman. 

Mr. BACHUS. ‘‘Delery.’’ ‘‘Delery.’’ Okay. There are some different 

pronunciations. They did a phonetic thing which I don’t think is 

quite on it. 

But before I make a formal introduction, I want to make two 

submissions for the record. 

First, I ask unanimous consent to place in the record written testimony from Dr. Douglas Merrill, a Princeton Ph.D. and former 

Chief Information Officer for Google. 

Mr. BACHUS. Google is a singing corporation, aren’t they? Isn’t 

that what they are? Maybe that is iTunes. They are not a singing 

corporation, are they? I guess not. 

Mr. JOHNSON. Singing corporation? 

Mr. BACHUS. You mentioned singing corporations. But anyway. 

He specializes in applying radical innovation to solve hard problems, including the problem of credit access for the under bank. 

He founded ZestFinance to use Google-style big-data math to provide credit to make smarter loans to under-served populations at 

lower rates. 

His algorithm has enabled ZestFinance to slash default rates by 

half and offer up to 50 percent savings for borrowers. Then Operation Choke Point nearly destroyed his business. 

He concludes that—and I quote—‘‘More than 100,000 underbanked Americans overpaid tens of millions of dollars in fees because both ZestFinance and its partner, Spotloan, were limited by 

Choke Point.’’ 

Also like to submit for the record former FDIC Chairman Bill 

Isaac’s letter. I ask unanimous consent to place in the record a letter from Bill Isaac, former Chairman of the FDIC, to the youngest 

member of the FDIC’s board of directors in history—no. He is the 
7 

youngest member of the FDIC’s board of directors in history, appointed by President Carter. 

He explains that the Bank Secrecy Act and anti-money laundering provisions are—and again I quote—‘‘are not intended to impose a duty on banks to ensure that their business customers are 

complying with every law in every State or that the businesses are 

treating customers fairly and delivering good value.’’ 

He also writes that, ‘‘Operation Choke Point is one of the most 

dangerous programs I have experienced in my 45 years of service 

as a bank regulator, bank attorney, consultant, and bank board 

member.’’ 

Is there any objection to this submission? Hearing none. 

[The information referred to follows:] 
8 
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15 
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Mr. BACHUS. At this time I would like to introduce our first witness, Honorable Stuart Delery. Is that right? Good. 

He was sworn in as Assistant Attorney General for the Civil Division on August 5, 2013, following confirmation by the U.S. Senate. He has led the division since March 2012. 

As an Assistant Attorney General, he oversees the largest litigating division in the Department of Justice. Each year the Civil 

Division represents some 200 client agencies in approximately 

50,000 different matters. 

The Civil Division represents the United States in legal challenges to Congressional statutes, administrative policies, and Federal agency actions. 

He joined the United States Department of Justice in January 

2009 as chief of staff and counsel to the Deputy Attorney General 

and later served as Associate Deputy Attorney General. From August 2010 until March 2012, he served as senior counsel to the Attorney General. 

Before joining the Department of Justice, Mr. Delery was a partner in the Washington, D.C., law firm of WilmerHale, where he 

was a member of the litigation department and the appellate and 

Supreme Court litigation practice group and a vice chair of the 

firm’s securities department. 

He graduated from Yale Law School and the University of Virginia. He clerked for Justice Sandra Day O’Connor and Justice 

Byron R. White of the U.S. Supreme Court and for Chief Judge 

Gerald—and how do you pronounce—‘‘Tjoflat’’?—— 

Mr. DELERY. ‘‘Tjoflat,’’ Mr. Chairman. 

Mr. BACHUS [continuing]. Of the U.S. Court of Appeals for the 

Eleventh Circuit. 

So we welcome your testimony. And you are recognized for that 

purpose. 

TESTIMONY OF THE HONORABLE STUART F. DELERY, ASSISTANT ATTORNEY GENERAL, CIVIL DIVISION, U.S. DEPARTMENT OF JUSTICE 

Mr. DELERY. Thank you very much, Chairman Bachus, Ranking 

Member Johnson, and Members of the Subcommittee. Thank you 

for inviting me here today and for providing the Department of 

Justice the opportunity to describe our work designed to protect 

consumers from fraud perpetrated by certain merchants, thirdparty payment processors, and banks. 

The Justice Department has made it a priority to fight consumer 

fraud of all kinds. Fraud against consumers comes in many forms, 

from telemarketing fraud to mortgage fraud, from lottery scams to 

predatory and deceptive online lending, and often strips our most 

vulnerable citizens of their savings and even their homes. 

The Civil Division’s consumer protection branch, along with the 

Criminal Division and the U.S. attorney’s offices across the country, has worked for decades to protect the health, safety, and economic security of the American consumer. 

Based on its years of experience in combatting fraudulent merchants and by following the flow of money from fraudulent transactions, the Department has learned that some banks and thirdparty payment processors, which are intermediaries between banks 
18 

and merchants, know that merchants are engaged in fraud and, 

yet, continue to process their transactions, in violation of Federal 

law. 

As a result, in November 2012, our attorneys proposed a concentrated effort to pursue fraud committed by banks and payment 

processors as a complement to other consumer protection work. 

This strategy aims both to hold accountable those banks and 

processors that violate the law and to prevent access to the banking system by fraudulent merchants, and this—this effort is sometimes referred to as Operation Choke Point. 

One of our investigations now has been resolved, as was mentioned earlier, and provides a useful example of our efforts in this 

area. 

In April, a Federal District Court in North Carolina entered a 

consent order and approved a settlement agreed to by the Department and Four Oaks Bank. 

According to our complaint, Four Oaks allowed a third-party payment processor to facilitate payments for fraudulent merchants despite active and specific notice of fraud. 

For example, Four Oaks received hundreds of notices from consumers’ banks, including statements by account holders submitted 

under penalty of perjury, that the people whose accounts were 

being charged had not authorized debits from their accounts. 

Four Oaks had evidence of efforts by merchants to conceal their 

true identities. Four Oaks also had evidence that more than a 

dozen merchants served by the payment processor had a return 

rate over 30 percent, a strong sign that the bank was facilitating 

repeated fraudulent withdrawals. And, indeed, one merchant had 

a return rate of over 70 percent. 

According to our complaint, despite these and other signals of 

fraud, Four Oaks permitted the third-party payment processor to 

originate approximately $2.4 billion in debit transactions against 

consumers’ bank accounts. 

So as the Four Oaks case demonstrates, the Department’s policy 

is to base its investigations on specific evidence of unlawful conduct. 

Nevertheless, in recent months, we have become aware of reports 

suggesting that these efforts instead represented an attack on businesses engaged in lawful activity. And I thank you for the opportunity to clear up this misconception. 

Our policy is to investigate specific unlawful conduct based on 

evidence that consumers are being defrauded, not to target whole 

industries or businesses acting lawfully, and to follow the facts 

wherever they lead us in accordance with the law, regardless of the 

type of business involved. 

As with virtually all of our law enforcement work that touches 

on regulated industries, our work in this area includes communication with relevant regulatory agencies. Such communication is designed to ensure that we understand the industry at issue and that 

we have all the information we need to evaluate enforcement options in light of the evidence we uncover. That is nothing new. 

So, for example, for many years, banking regulators have warned 

banks about the heightened risks to consumers associated with 

third-party payment processors. 
19 

In some of that guidance, FDIC has explained that, although 

many clients of payment processors are reputable merchants, an 

increasing number are not and should be considered high risk. And 

the FDIC has provided examples of high-risk merchants for purposes relevant to its regulatory mission. 

The Department’s mission, however, is to fight fraud. And we 

recognize that an entity simply doing business with a merchant 

considered high risk is not fraud. 

So, in summary, our efforts to protect consumers by pursuing 

fraudulent banking activity are not focused on financial institutions that merely fail to live up to their regulatory obligations or 

that unwittingly process a transaction for a fraudulent merchant. 

But when a bank either knows or is willfully ignorant to the fact 

that law-breaking merchants are taking money out of consumers’ 

bank accounts without valid authorization and the bank continues 

to allow that to happen, the Department will not hesitate to enforce the law. 

So thank you once again for the opportunity to appear before you 

today. And at this time, Mr. Chairman, I would be happy to answer 

any questions that you or the other Members of the Subcommittee 

may have. 

[The prepared statement of Mr. Delery follows:] 
20 
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Mr. BACHUS. Thank you very much. 

First question will be Mr. Holding. 

Mr. HOLDING. Thank you, Mr. Chairman. 

You testified on Tuesday and, at that hearing, the FD—well, 

the—on Tuesday, the FDIC testified that they had authored a 

somewhat notorious high-risk activity list that predicates Operation Choke Point scrutiny. 

You know, this is a somewhat dangerous list because it essentially tells banks that they shouldn’t do business with certain industries, irrespective of the fact than an industry is operating entirely within the law, and most of these industries are legal under 

Federal, State, and local law. Some even have significant First 

Amendment protections. 

So did the Department, the DoJ, conduct a review of whether 

any of these restrictions would violate the First Amendment rights 

of Americans? And, if they did not, why not? 

Mr. DELERY. So, Congressman, the list that you are referring to, 

I believe, that was discussed by the FDIC on—at the hearing on 

Tuesday is a list that the FDIC prepared for its purposes. 

As I said then, that was not something that the Department of 

Justice was involved in preparing. And whether a financial institution does business with a merchant that is in an industry on that 

list or any other list is not, under our policy, a basis for the investigations that we are talking about here. 

Mr. HOLDING. Does the Department have its own definition of 

high-risk activity that would create liability under Operation 

Choke Point? 

Mr. DELERY. Right. So that is not the basis for the policy or the 

actions that we are taking here. 

Mr. HOLDING. But does the Department have their own definition, you know, of what seems to be somewhat of a term of art that 

is developing here? 

Mr. DELERY. No. I don’t believe so, Congressman. 

The investigations that we are conducting are based on evidence 

of fraudulent conduct by particular institutions that are based on 

traditional law enforcement activities or investigative techniques. 

So we are investigating institutions based on evidence—— 

Mr. HOLDING. So you don’t pay any attention to that definition? 

So you don’t use the FDIC’s definition or list? That doesn’t go into 

your calculus in making a decision—prosecutorial decision, Fourth 

Amendment decision? 

Mr. DELERY. We are basing our investigations on evidence that 

we receive from various sources of actual fraudulent activity in a 

particular context. We are not looking at whole industries. 

So the information may come from a referral from a bank whose 

customers have been victimized or complaints from the customers 

themselves or from investigations that we are conducting into 

fraudulent merchants. 

Mr. HOLDING. Okay. 

Mr. DELERY. So it is a standard series of investigative techniques. 

Mr. HOLDING. Let’s go to the funding. 

The Department has a working capital fund used to support operations, and one part of that fund is known as the 3 percent fund 
26 

that allows the Department to, you know, retain 3 percent of affirmative civil recoveries. 

You know, as this is a non-appropriated fund, there are no 

strings attached from Congress on how it is used and it inhibits 

oversight. You know, aside from an occasional question from Congress, the Department can use the money however it sees fit. 

So, you know, these funds are utilized to hire attorneys, file additional enforcement actions. So I am concerned this is unaccountable 

and non-transparent and somewhat of a slush fund. 

So I know you have been asked about this at another hearing. 

So, hopefully, you have had a chance to reflect and can answer it 

now. 

How much money is currently held in the working capital fund? 

And how much money is utilized to hire attorneys? How many FTE 

does this support? And can you provide to the Committee an accounting for the last 5 years including the unobligated funds held? 

Mr. DELERY. So, Congressman, that was a subject that came up 

at the hearing on Tuesday. We are looking into responding to similar questions, and we would be happy to take those back as well. 

I don’t have the specific answers on that here today. We could certainly get back to the Committee on that. 

You know—and, obviously, the Civil Division is not the only part 

of the Department that the 3 percent fund supports, and it only 

supports small and specified parts of—of the work that we do typically related to our affirmative—affirmative enforcement efforts. 

Mr. HOLDING. Thank you. 

Mr. Chairman, I yield back. 

Mr. BACHUS. Thank you. 

I am going to recognize Mr. Collins for a unanimous consent request and then the Ranking Member. 

Mr. COLLINS. Thank you, Mr. Chairman. 

And especially in light of the vote series and other things and 

with other schedules. 

I have a letter here from TSYS, from Mr. Troy Woods, that I 

would like to enter into the record detailing concerns about Operation Choke Point, which highlight many of my concerns with this 

amazingly misguided program. 

Mr. BACHUS. Hearing no objections, it is introduced. 

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Mr. BACHUS. And the Ranking Member is now recognized. 

Mr. JOHNSON. Mr. Chairman, I would like to be recognized for 

the—only for the purpose of introducing by unanimous consent for 

the record a letter from Howard Langer, a professor at the law 

school of the University of Pennsylvania and a founding Partner of 

Langer, Grogan & Diver, PC, which describes his work against 

Wachovia Bank, which paid full damages to 750,000 victims of approximately 130 mass market frauds. 

And I would also like to tender for the record a letter from the 

Americans for Financial Reform, a coalition of several dozen consumer and civil rights groups, urging this Subcommittee to suppress efforts to ensure that banks and payment processors avoid facilitating illegal activity by complying with long-standing due diligence requirements to know their customers, monitor return rates, 

and be alert for suspicious activity; and, also, a—the written testimony of Lauren Saunders, who testified on behalf of the National 

Consumers Law Center in Tuesday’s hearing on the Operation 

Choke Point in the Committee on Financial Services; and last, but 

not least, several guidance documents issued under the Bush Administration on high-risk merchants and payment processors. 

I will tender these for the record. 

Mr. BACHUS. Without objection, those materials are entered into 

the record. 

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Mr. BACHUS. And at this time the Ranking Member is recognized 

for 5 minutes. 

Mr. JOHNSON. If I might, Mr. Chairman, I would like to—since 

I am the only—since I am the only Democrat here, I would like to 

wait until the other Republicans have asked their questions before 

I ask my questions. 

Mr. BACHUS. Mr. Marino, would you like to be recognized? 

Mr. MARINO. Thank you. Thank you, Chairman. 

Thank you, Ranking Member. 

Assistant Attorney General, welcome. I am sure you did a little 

reading on us beforehand and know that my background and my 

colleague to the right, Mr. Holding—we were U.S. attorneys and 

district attorney. I was a district attorney as well. 

And there is no one here in D.C. that is more of a law enforcement guy than I am. I have the utmost respect for U.S. attorneys 

and prosecutors. I have—had a great deal of pride and still do to 

work at Justice and to be nominated. 

I do have a concern with what is taking place—what appears to 

be taking place. 

You have been the one to be chosen to be here and explain. I give 

you courage for stepping up to the plate and doing that. It should 

reflect in your review when that comes up, and I think you are 

warranted a raise. 

But, given that, ‘‘fraud’’ is a very vague term. And we, as prosecutors, you, as a prosecutor—we have a great deal of power. You 

probably have more power than anybody on Earth when it comes 

to investigations, whether it is civil or criminal, and we know that 

civil cases do turn into criminal cases. 

And I had the same philosophy as you do. Follow the money. I 

did it with drug dealers. I did it with organized crime. I did it with 

money laundering. 

My concern is—I want you to, if you would, please, convince me 

that this is not a witch hunt, that this is not the Department of 

Justice—let’s forget about the White House and the Administration. 

Because I always felt the Department of Justice—although I 

worked for the President, we were and are an independent agency 

that enforces the rule of law, not politics. 

And if memory serves me right—and I looked things up and 

memory does serve me right—that there is no definition in ‘‘fraud.’’ 

We talk about wire fraud or security fraud. There is really no 

definition in the Federal statute. Courts have made the determination as what the definition is. 

And just—I taught constitutional law a little bit, and I want to 

refer back to jury instructions that courts—that I have had courts 

use on describing to a jury what fraud is. 

And there is a lot more to this. But it is a general term which 

embraces an ingenious effort, all ingenious efforts, and means that 

individuals devise to take advantage of others. We, as prosecutors, 

can interpret that in numerous ways. 

Please tell me that that is not being used for political reasons. 

Mr. DELERY. Well, Congressman, I can certainly tell you that it 

is not in the matters that I supervise and more broadly. 
76 

And I am happy to address the issues that you have raised because I do agree with your general approach and I think that it is 

important for us to respond. 

And so I guess what I would do is point to the origin of these 

cases and how we came to pursue them and, as the best evidence 

of what these cases are about, the one that I mentioned earlier, 

Four Oaks, which was actually done in partnership with Mr. Holding’s former district in North Carolina. 

And, you know, our policy in these cases is to investigate specific 

evidence of fraud based on evidence that consumers are being 

harmed, are being defrauded, not whole industries or businesses 

acting lawfully. 

We are holding financial institutions accountable for their own 

misconduct, for their own fraudulent conduct, not for the misconduct of anybody else. 

And so, if you look at Four Oaks, Four Oaks was a bank that 

facilitated transactions by a payment processor, even though it had 

hundreds of sworn complaints about unauthorized transactions, it 

had received warnings from NACHA, which is the electronic payments association, it received a warning by the Arkansas Attorney 

General’s Office—— 

Mr. MARINO. I am familiar with that, and I have followed the 

facts on it. 

But you did make a statement that—you said, ‘‘We at Justice decided to pursue these fraud cases.’’ 

Was it you that decided to pursue? Was it someone above you? 

Was it the attorney general or the DAG? Or did it come from the 

White House? 

Mr. DELERY. So it came—it originated as a proposal from career 

lawyers in the Justice Department who had spent many years 

working on cases involving fraudulent merchants. And, based on 

that work, following the money, they noted the involvement of— 

knowing involvement of some payment processors and banks. And 

that was the genesis of these cases. And it was under my authority 

in the Civil Division that it was done. 

Mr. MARINO. I think I am well over my time. We have to go and 

vote. 

But just as a prosecutor, promise me this, that we are following 

the law, that you are following the law, that these are genuine 

fraud cases that are not manipulated to look like fraud cases, and 

that we, as prosecutors, have a responsibility to focus on the rule 

of law and nothing else. 

Mr. DELERY. I agree, Congressman. That has been the policy of 

these cases from the beginning and will continue to be. 

Mr. MARINO. Thank you. I yield back. 

Mr. BACHUS. Thank you. 

We have votes on the floor. So we will be recess—how many 

votes are there? Three votes. So we will—— 

Mr. Smith, you could go ahead, but I think it is—there is only 

3 minutes left on the floor. 

Would you prefer to ask a question or two? 

Mr. SMITH. Could I ask quickly? 

Mr. BACHUS. Okay. Go ahead. I am going to recognize Mr. Smith. 

Mr. SMITH. Thank you, Mr. Chairman. 
77 

My question—I have two. Has anyone at DoJ voiced concerns 

that Operation Choke Point could go too far and harm entire industries? 

Mr. DELERY. Well, certainly, we have heard some of the reports 

that—you know, there have been reports in the press. We have had 

letters from Members of Congress. And we always take seriously 

the question about whether our efforts to combat fraud are affecting institutions that we are not, in fact, investigating. 

So that is something that we always are mindful of and take into 

account and review what we are doing to avoid those—those effects, and we are doing that in connection with these cases. 

Mr. SMITH. So has anyone voiced concern at DoJ? 

Mr. DELERY. I think what I would say is that we have responded—we have—we have heard the concerns that people have 

been expressed—that people have expressed and have responded by 

not only looking at what we are doing, but, also, taking affirmative 

steps to make clear to the public and to industry what our policy 

is about these cases, what we are and are not doing, so that we 

can avoid any unintended effects that go beyond what we are trying to do, which is to hold institutions accountable for fraud that 

they are committing. 

Mr. SMITH. How many institutions have you all prosecuted from 

Operation Choke Point? 

Mr. DELERY. So this set of cases grew out of some prior work, 

including the Wachovia case that was mentioned earlier. But of the 

ones—of the investigations that began, you know, in late 2012, 

early 2013, we have one resolution, the Four Oaks Bank case. 

There are other investigations that are still in process. 

Mr. SMITH. So only one from Operation Choke Point? 

Mr. DELERY. As I indicated, there are other investigations still 

in process, but only one res—one of them has been resolved at this 

point. 

Mr. SMITH. Okay. You were in private practice at a private law 

firm. What is your estimate of the costs to comply with the average 

subpoenas that DOJ sent out under Operation Choke Point? 

Mr. DELERY. Congressman, I don’t know what the estimate 

would be. I think that, in this context, we have sent subpoenas 

where we had reason to believe that the recipient either—the recipient had information about fraudulent conduct, either its own or 

on behalf of somebody else. 

Because sometimes subpoenas seek information, you know, related to third parties. And, as is usually the case, we have a dialogue with the recipients to discuss the scope and how the best attempts—what the best process would be for responding. 

Mr. SMITH. I think it is very important that any government 

agency, any Federal agency, let alone DOJ—that if they are asking 

or requesting something out of any industry or any individual or 

any taxpayer, they better know the ramifications of their ask and 

how much it is going to cost them. And the fact that you don’t have 

any idea is very disheartening to me. 

Mr. DELERY. And I think that that is something that our lawyers 

keep in mind as they are framing the—framing the subpoenas, to 

target them to the information that we need, and that is something 
78 

that we are—we are mindful of in this and all of the other areas 

that we pursue. 

Mr. SMITH. You need to be more diligent to make sure you can 

understand how much of a financial impact your asks are going to 

have on private industry and private citizens before you start asking. 

Thank you, Mr. Chairman. 

Mr. BACHUS. Thank you. 

And at this time we will recess for votes on the floor and then 

we will return at the termination of those votes. Thank you. 

Mr. DELERY. Thank you, Mr. Chairman. 

Mr. ISSA [presiding]. The Committee will come back to order. 

The gentleman from Georgia is recognized. 

Mr. JOHNSON. Thank you, Mr. Chairman. 

This hearing appears to be in keeping with a couple of hearings 

that I have been associated with this week having to do with allegations of Presidential overreach, abuse of authority, even murmurs of impeachment. And this is a hearing that is in keeping with 

the spirit of those hearings. 

One hearing yesterday, in Armed Services, the Committee approved a subpoena for emails from Lois Lerner of the IRS. And 

then the Justice Department had a similar hearing. And so we are 

Benghazi, we are IRS, and now we are into the subject of the big 

Wall Street banking industry being singled out by this Administration, and being singled out for persecution and criminal prosecution 

because of allegations, unfounded allegations of consumer fraud 

and other alleged offenses. 

So far, I mean, a hearing, ‘‘Guilty Until Proven Innocent? A 

Study of the Propriety and Legal Authority for the Justice Department’s Operation Choke Point.’’ Well, I have not heard any questions about the improper use of authority, legal authority, for the 

Justice Department’s Operation Choke Point. And I have heard 

nothing about any financial service corporation being singled out 

for prosecution in the Justice Department’s Operation Choke Point. 

Mr. ISSA. Would the gentleman yield? 

Mr. JOHNSON. Yes. 

Mr. ISSA. My staff has informed us that, from the 50 subpoenas 

that were issued, only one was to a large bank and it wasn’t a Wall 

Street bank. The 50 subpoenas that we know of were issued to 

credit unions and small community banks. I just wanted make sure 

the gentleman from Georgia knew that. 

Mr. JOHNSON. And that is a point well taken. But I think this 

hearing has devolved into a semi-spectacle with allegations of industry profiling, and I think we have kind of blown up some legitimate investigations and one civil action by the Justice Department 

into a misuse of authority by the President, oppressing banks. And 

this is not the case. And I am glad that my friend on the other side 

recognizes that. 

But I do want to ask you, sir, about the complaint filed against 

Four Oaks Bank. The Justice Department’s complaint against Four 

Oaks Bank is the only civil action against any party as a result of 

Operation Choke Point. Isn’t that correct? 

Mr. DELERY. Yes, Congressman, it is one that has been filed. 
79 

Mr. JOHNSON. And this is a community bank, or a regional bank, 

or a large commercial bank. 

Mr. DELERY. Well, Four Oaks, I would say, I am not sure how 

to define it, it is probably regional, is how you would explain it. But 

I think one of the things that the evidence that we found, as reflected in the complaint, demonstrates is that an institution like 

that can process a very large number of transactions, more than 9 

million for a single payment processor at $2.4 billion. So the numbers that we are talking about can be very large. 

Mr. JOHNSON. And in the complaint filed against Four Oaks 

Bank under FIRREA by the Department of Justice, the United 

States of America alleged that the bank ‘‘knew or was deliberately 

ignorant of the use of its accounts and its access to the national 

banking system in furtherance of a scheme to defraud consumers,’’ 

end quote. Although this complaint was settled, how would a court 

construe this actual fraud under FIRREA? 

Mr. DELERY. I think if you look at the detailed allegations in the 

complaint, there was clear evidence of widespread information that 

the bank had about fraudulent transactions that it was processing. 

That information came from a number of categories, including complaints, sworn complaints by customers who had been victimized, 

by warnings from a State attorney general and from another organization, had evidence that one of the merchants was attempting 

to hide its identity, and it had very high return rates for more than 

a dozen merchants that were more than 30 percent—one was more 

than 70 percent—which, again, is a strong indication of fraud. 

Bank officials knew this information and, according to the complaint, continued to process it anyway. And that was the basis for 

the FIRREA action in that case. 

Mr. BACHUS [presiding]. Thank you. 

Mr. JOHNSON. Well, now you didn’t sue Four Oaks Bank because 

it provided services to high risk merchants, did you? 

Mr. DELERY. The basis for the action was that the bank knew, 

knowingly facilitated, and in certain circumstances turned a blind 

eye to evidence that it had of fraud. So I do think that this case 

is a good example of the work that we are doing, which is to hold 

banks accountable for their own unlawful conduct under existing 

law. 

Mr. BACHUS. Thank you. 

Mr. JOHNSON. Well, as a taxpayer I want to thank you for doing 

that. 

And I will yield back. 

Mr. BACHUS. Thank you, Mr. Johnson. 

At this time, I recognize Mr. Issa. 

Mr. ISSA. Thank you, Mr. Chairman. 

Thank you for being here today. I have got a number of questions. 

First of all, I would ask unanimous consent that the subpoena 

dated May 20, 2013, from the Department of Justice Consumer 

Protection Branch be placed in the record at this time. 

Mr. BACHUS. Without objection. 

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Mr. ISSA. Thank you. 

In this document, which I am—— 

Mr. BACHUS. Now we will start your time. 

Mr. ISSA. Thank you. Thank you. That would be great. 

Mr. BACHUS. Or are you still introducing your—— 

Mr. ISSA. I am done introducing. 

Mr. BACHUS. Okay. 

Mr. ISSA. But in this document it, which I am told there is at 

least 50 subpoenas identical to this other than the name, are you 

familiar with this document? 

Mr. DELERY. I believe so. I certainly am familiar with ones like 

that. I am not sure about that one. 

Mr. ISSA. We know that 50 subpoenas were served that were substantially similar or identical except for name. How many subpoenas did you serve similar to the one that you believe I have got 

here? 

Mr. DELERY. Well, again, I do think some of the documents have 

indicated in the neighborhood of 50, which again, were not all necessarily identical. 

Mr. ISSA. Well, let’s go through them. You named one company 

in which you had, prior to the serving of the subpoena, allegations 

of wrongdoing and complaints by customers. Is that correct? I 

mean, that is a standard to go looking, is that you have allegations 

of a bank doing things wrong, and that would be a reasonable reason. 

Mr. DELERY. Yes. 

Mr. ISSA. You had that in the case of Four Oaks, right? 

Mr. DELERY. Again, that certainly was the basis for the case. 

And as to all of the subpoenas—— 

Mr. ISSA. Well, you are not allowed to go on fishing expeditions 

just generally and harass banks, are you? 

Mr. DELERY. In each of the—— 

Mr. ISSA. No, no, no, that is a question. You are not allowed to 

go and just harass for the sake of—you can’t send subpoenas to 

every single bank. Let me rephrase that. The statute allows to you 

do it, but that is not your practice. Is that correct? 

Mr. DELERY. That is correct. And in this case there was a reasonable suspicion, a reasonable basis for each of the subpoenas that 

were issued. 

Mr. ISSA. Then since these cases have come to a close without 

prosecution, would you provide to us the reasonable suspicion in 

the case of the—or at least an outline of them—in the case of these 

50 subpoenas served? 

Mr. DELERY. I think, Congressman, many of them relate to ongoing investigations. 

Mr. ISSA. Obviously, only the closed cases. 

Mr. DELERY. And so we can certainly look at the request. As I 

indicated earlier, we have a number of open—— 

Mr. ISSA. Okay. Well, let’s go through this. It has earlier been 

testified that in fact these were just subpoenas and they were not 

intended to intimidate or cause people to change their behavior. Is 

that right? 

Mr. DELERY. Right, they were intended to get information from 

institutions that we believed had evidence of fraud. 
110 

Mr. ISSA. So now listed in those evidence of fraud, in addition to 

Ponzi schemes, which are criminal, period, and if somebody knew 

about a Ponzi scheme, it is inherently a crime, right? 

Mr. DELERY. That is my understanding, yes. 

Mr. ISSA. There is credit card repair services, debt consolidation, 

online gaming, government grants, or will-writing kits, payday and 

subprime. Threw in pornography, I thought that was good, that 

pornography is inherently something that you should tell people 

about. Online tobacco, is that unlawful? 

Mr. DELERY. I am not sure what document you are looking at. 

Mr. ISSA. I am looking at the examples that are in your subpoena. Your subpoena includes an attachment of a financial institution letter. Your subpoena, all 50 of your subpoenas included an 

intimidating list of firearm sales, pharmaceutical sales, sweepstakes, magazine subscriptions, online tobacco. You included FDIC 

high-risk list in there that includes a series of lawful businesses. 

Are you aware of that? 

Mr. DELERY. So the guidance was attached—— 

Mr. ISSA. Sir, were you aware of that? 

Mr. DELERY. I am aware that the guidance was attached to, my 

understanding, is not all of the subpoenas. 

Mr. ISSA. Oh, okay. Well, we would love to have all of them. 

In testimony before the House Financial Services Committee on 

Tuesday you repeatedly disclaimed any involvement in the FDIC 

high-risk merchant guidance. Now, isn’t is true that—assuming 

that this is a correct document, we would like you to authenticate 

it here today, and we will provide it to you—this in fact shows that 

what you said in Financial Services just isn’t so? You included the 

guidance. You said in Financial Services you didn’t, and I quote, 

you repeatedly disclaimed any involvement with the FDIC highrisk merchant guidance, and then you include it in your subpoena. 

How is somebody supposed to think that you didn’t participate 

in promoting this and you put it into a subpoena that threatens the 

hell out of a small community bank or credit union? How do you 

reconcile that? 

Mr. DELERY. So I would be happy to answer that question, Congressman. 

Mr. ISSA. I would be happy to get an answer to that one. 

Mr. DELERY. The guidance that was attached is guidance that 

the FDIC provided. It discusses in general terms the risks that 

third-party payment processors can present—— 

Mr. ISSA. That is fine. But didn’t by inclusion of that guidance, 

didn’t you in fact by inclusion associate yourself with the position 

of the FDIC? And didn’t you on Tuesday say just the opposite in 

the Financial Services Committee? So are you going to correct the 

record at Financial Services to disclose that in fact you had associated yourself, you had included the guidance, and you did in fact 

essentially team yourself with the FDIC for guidance that would 

say, credit card repair, payday subprime, online tobacco sales, firearm sales, ammunition sales, pharmaceutical sales, these are high 

risk, in a document you attached and then said that you are not 

associating yourself with the FDIC? Which is true? 

Mr. DELERY. Congressman, I don’t think that that is a complete 

description of what I said on Tuesday. Our policy in this area—— 
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Mr. ISSA. Did you sign the subpoenas? 

Mr. DELERY. Yes. 

Mr. ISSA. I find your signature on the subpoena. 

Mr. DELERY. Yes. 

Mr. ISSA. You signed the subpoena. It had—— 

Mr. JOHNSON. Mr. Chairman? 

Mr. ISSA. I just want to make one point and I will close. 

Mr. JOHNSON. I just don’t want you to badger the witness. 

Mr. ISSA. I don’t want to badger, I just want to make a point in 

closing, because I believe the Financial Services Committee has a 

real reason to relook at this gentleman’s testimony. He signed the 

subpoenas, he attached the subpoenas, specific allegations of high 

risk, and then before the Financial Services Committee he testified 

that in fact he was not associated, and yet it was stapled to it. 

It is not common for subpoenas to have other documents and fliers stapled to them. Generally, a subpoena isn’t owned by the 

issuing party. 

So I appreciate the gentleman yielding me the additional time. 

I thank the Chairman for his indulgence. And I will have a copy 

of this brought to the gentleman to refresh his memory of what he 

signed. 

Mr. BACHUS. Thank you. 

Mr. JOHNSON. Well, I think it is only fair that he see the document that you are seeking to—— 

Mr. ISSA. And we are going to give a copy to him right now. But 

he signed it. I figure he saw it once. 

Mr. BACHUS. He signed it. 

Mr. JOHNSON. He still deserves to see it. 

Mr. BACHUS. Well, but he signed it. I mean, he signed it. 

Mr. JOHNSON. You mischaracterized what he signed, if he signed 

it, and you are drawing conclusions from it that are probably—— 

Mr. ISSA. Mr. Chairman, the gentleman may be right. I would 

like unanimous consent for the Attorney General to have the opportunity to see it. 

Mr. BACHUS. Let me ask, is that it right there? 

Do you want to see it? 

I guess we could ask him if in fact is familiar with that. 

Mr. JOHNSON. Because he has not been able to explain one answer in response to the questions. 

Mr. BACHUS. Do you have a motion? I mean, we will give our witness the opportunity. 

Are you familiar with that document? 

Mr. DELERY. Yes, Mr. Chairman. I think it is one of the subpoenas, as I indicated. 

Mr. BACHUS. Well, just by way of giving you an opportunity to 

explain, did you sign that subpoena? 

Mr. DELERY. Yes. 

Mr. BACHUS. Okay. And is that list of high-risk categories, is 

that attached to the subpoena? 

Mr. DELERY. There is a footnote in one of the attachments to the 

subpoena that makes reference to certain industries or businesses 

that the FDIC may consider to be high risk. And I think that goes 

to the point of the discussion on Tuesday. I think if you look at the 

overall discussion on Tuesday, what I explained was that our basis 
112 

for issuing the subpoenas was to pursue specific evidence of unlawful conduct, based on fraud against consumers, that we were not 

seeking to target any industry or business acting lawfully. 

And in fact I also said that the participation of a financial institution with any particular industry, whether on a high-risk list or 

otherwise, was not a basis for an action that we were pursuing. So 

I think that is what I was saying the other day, on Tuesday. 

Mr. BACHUS. Actually, if you look on page 1 of that attachment, 

it not only refers to it, it lists different payday loans, tobacco sales, 

firearm sales, pharmaceutical sales, magazine subscriptions, 

sweepstakes. It actually narrows it to those categories. So it actually is a more concise list than the FDIC’s list. 

Mr. DELERY. I am not sure, Mr. Chairman, which page you are 

looking at on this point. 

Mr. BACHUS. The revised guidance on payment processor relationships, dated January 31st, 2012. 

Mr. DELERY. Yeah. I think I am looking at that. That is part of 

the FDIC—— 

Mr. BACHUS. It does say payday or subprime loans, pornography. 

You are not equating the two, are you? 

Mr. DELERY. No. 

Mr. BACHUS. Online tobacco or firearm sales, pharmaceutical 

sales. 

Mr. DELERY. No, Congressman. No, Mr. Chairman. I think what 

we have said is that participating in any particular line of business 

is not evidence of fraud. That is not how we are—— 

Mr. BACHUS. Do you think it was appropriate to attach a list to 

your subpoena? 

Mr. DELERY. I think that, as I understand it, the purpose of the 

attachment was to respond to questions about the issues and the 

potential for fraud that third-party payment party processors provide. 

I will come back. 

Mr. JOHNSON. We will have a second round. 

Mr. BACHUS. Yeah, absolutely. And we will give everybody plenty 

of time. But firearm sales, I mean, that is—— 

Mr. ISSA. Mr. Chairman, one might say beauty is in the eye of 

the beholder. And this Administration considers firearm sales, ammunition, as somewhat less beautiful than others. But that is the 

reason that this whole high-risk list under Operation Choke Point 

is so problematic, it makes ideological decisions of what is high 

risk, rather than economic. 

Mr. JOHNSON. I would like to ask this witness whether or not it 

is true that this list that we are talking about of potentially illicit 

activities that banking institutions should be aware of—— 

Mr. BACHUS. Yeah, yeah, that is right. Illicit activities, that is a 

good word. Payday lending is illicit. 

Mr. JOHNSON [continuing]. Whether or not that list is something 

that predates the Obama administration. Isn’t it a fact that the 

FDIC list of activities that is the subject of this discussion is a 

product of a prior Administration? 

Mr. BACHUS. I can answer that. It was 2011, which was 3 years 

into the Obama administration. 
113 

Mr. ISSA. Mr. Chairman, for the record, in 2008 there was a 

warning on high risk, but there was no specificity. They didn’t 

name any entity. So it is very different to say beware of high risk. 

Mr. BACHUS. And they didn’t subpoena. 

Mr. ISSA. They didn’t subpoena. And if you a 50 percent return 

rate, that is high risk. 

Mr. BACHUS. Let me say this, we are going to have a second 

round. So we will go to Mr. Jeffries. 

Mr. JOHNSON. Well, for the record, the OCC on September the 

1st of 2006 stated specifically listed industries associated with high 

volumes of unauthorized returns in a guidance document. 

Mr. BACHUS. The Justice Department? 

Mr. JOHNSON. The OCC. And so these are not Justice Department guidelines, even though they were referred to in the subpoena. 

Mr. BACHUS. But what we are talking about here is a subpoena 

that cost hundreds of thousands of dollars to comply with on occasions. And you are all familiar with the term, in fact anyone that 

has ever served on Financial Services knows the term de-risking. 

That is a term that is used by the Justice Department. De-risking 

names that companies like to avoid risk. If you send them a subpoena and you list companies that are ‘‘risky’’ firearm sales—— 

Mr. JOHNSON. Not companies, but industries. 

Mr. BACHUS. Industries. They are going to avoid risk by jettisoning those customers. We all know that. You know that. 

Mr. JOHNSON. If there is any indicia of illegal activity that would 

derive from their actions. 

Mr. BACHUS. Well, getting a subpoena and saying you are investigating fraud is a pretty, pretty strong method. 

Mr. JOHNSON. If you have a reasonable suspicion that a fraud 

has been committed, Mr. Chairman, I think that that is what 

our—— 

Mr. BACHUS. And one thing, Mr. Delery, one reason that we are 

so concerned about this, normally you go to a court and you get a 

subpoena, a court approves it. This is one of the few cases under 

FIRREA, as you know, where you don’t have to get the court’s approval. You can launch these things and the burden of proof is very 

low. 

Mr. ISSA. Mr. Chairman, you are exactly right, and I think Mr. 

Johnson made the point very well, in that if there is evidence of 

fraud, which apparently there may have been in one case, then the 

subpoena would follow, if you will, almost the ordinary course, even 

though it doesn’t need a judge. 

In the case of issuing 50, if there is not a specific allegation but 

rather a laundry list of industries that they should, if you will, derisk themselves from, the chilling effect on those industries is undeniable. 

Mr. BACHUS. Thank you. 

Mr. Jeffries, we are going to recognize you for 5 minutes now. 

Mr. JEFFRIES. Mr. Chairman, I appreciate the—— 

Mr. BACHUS. Five or 6 minutes, as everybody else has had. 

Mr. ISSA. I ask unanimous consent the gentleman have 7 or 8 

minutes. 
114 

Mr. JEFFRIES. After that colloquy, I was going to suggest 10 or 

15. 

And I would just suggest that I find it ironic, there is a lot of 

concern about lawlessness in this town and in this institution. I 

would just think that regular order should prevail on this Subcommittee, particularly a Subcommittee where we have got a topic 

so inflammatory in terms of the subject matter, guilty until proven 

innocent. 

And I guess I am struggling with that topic and reconciling its 

sort of explosive rhetoric with the notion that it seems that some 

Members have come into this Committee already presuming the 

guilt of the Justice Department and its activity connected with Operation Choke Point. 

And I guess hypocrisy is not a constraint in this institution. I 

have figured that out over my 18 months. But nonetheless, hopefully we can have an exchange where I get some understanding as 

to the facts related to this program and not simply political rhetoric 

directed at the Department of Justice. 

Now, it is my understanding that three separate decisions by 

courts in the Southern District of New York have upheld the Department of Justice’s authority under FIRREA. Is that correct? 

Mr. DELERY. Congressman, yes, those are referring to decisions 

that recognize the scope of the conduct that FIRREA prohibited in 

order to protect the integrity of the financial system. 

Mr. JEFFRIES. And would it be fair to say that some District of 

New York courts are amongst the most commercially sophisticated 

district courts in the Nation, just given the nature of the subject 

matter that they often find before them? 

Mr. DELERY. Yes, I think that that is fair. And I would also point 

out that these are the only three cases that I am aware of addressing the question. So all three courts to have addressed it have answered the question the same way. 

Mr. JEFFRIES. Right. And these courts I believe also concluded 

that the phrase affecting a Federally insured financial institution 

includes financial institution that engages in fraudulent activity 

that harms itself. Is that correct? 

Mr. DELERY. Yes. 

Mr. JEFFRIES. Okay. And in United States v. Countrywide, I believe the court dismissed the defendant’s argument that Congress 

did not intend FIRREA to include financial institutions that are 

parties to fraud and in fact characterized that position that seems 

to be supported by some members of this panel as utterly unconvincing. Is that correct? 

Mr. DELERY. I don’t remember the phrase specifically, but I do 

think all three decisions, looking at the text, structure, and legislative history of the statute, concluded that it provides broad antifraud protection where fraud affects a federally insured financial 

institution. 

Mr. JEFFRIES. Okay. And I would just note for the record that we 

are preparing to sue the President based on alleged lawlessness, 

and some within the House of Representatives have concluded that 

the Article III court system should be the arbiter as to whether this 

President has engaged in ‘‘lawlessness.’’ And that is fine. That is 

the prerogative of the majority in the House of Representatives. 
115 

But as it relates to this particular subject matter before us, as 

you have pointed out, every single court to look at the legality and 

the Justice Department’s legitimacy to move forward as it has, has 

concluded that you are well within the boundaries of the law. And 

in fact, at least in one instance, has basically characterized the arguments being made by defendants and or their sympathizers as 

baseless in law. 

And so there are a lot of things that we as a Committee and we 

as a Congress could be focused on. Certainly, I think the effort to 

hold financial institutions accountable for their actions and to 

make sure that consumers in the United States of America and 

those that we represent aren’t harmed by reckless behavior, seems 

to be an appropriate thing for the Department of Justice to be engaging in, particularly given the fact that reckless behavior by financial institutions writ large caused the collapse of the economy 

in 2008, plunging us into the greatest economic crisis since the 

Great Depression. 

And so I support the effort and applaud you, the Justice Department, for continuing to do what is necessary in the best interest 

of the American people. And I expect that as additional cases wind 

their way through the court system, they will equally be determined to be frivolous. 

And I yield back. 

Mr. BACHUS. I am sorry, you yield back? 

Mr. JEFFRIES. Yield back, with 5 minutes to spare. 

Mr. BACHUS. Okay, thank you. That was a shock to me. I wasn’t 

expecting that. Thank you, Mr. Jeffries. 

Mr. Holding? 

Mr. HOLDING. Mr. Chairman, I have had my turn. 

Mr. BACHUS. All right, thank you. I guess it is my turn. 

Mr. Delery, in testimony on Tuesday you repeatedly stated that 

this is normal law enforcement initiative, and we are only interested in actual fraud. So you have issued 50 subpoenas. Is that correct? 

Mr. DELERY. That is the ballpark for the number. 

Mr. BACHUS. Okay. How many settlements have you procured? 

Mr. DELERY. Again, as I indicated, so far there is one case that 

has been resolved; others are ongoing. And obviously some of those 

subpoenas—— 

Mr. BACHUS. When did you start issuing these subpoenas? 

Mr. DELERY. It was in early 2013, so a little more than a year 

ago. 

Mr. BACHUS. Eighteen months ago, 17 months ago, 16? 

Mr. DELERY. Right. 

Mr. BACHUS. And Four Oaks Bank is the only one that—so zero 

lawsuits or prosecutions, right? 

Mr. DELERY. Again, there are ongoing both civil and criminal investigations. 

Mr. BACHUS. Investigations, but no prosecutions. 

Mr. DELERY. Not so far. 

Mr. BACHUS. Okay. So you have issued 50 subpoenas. 

Mr. DELERY. And again, some of the subpoenas related to the 

same matter. 

Mr. BACHUS. To the same bank? 
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Mr. DELERY. Or to seeking information about the same—not necessarily to the same bank, but to related organizations or institutions that might have information—— 

Mr. BACHUS. But 50 different financial institutions received subpoenas? 

Mr. DELERY. I am not sure that that is right. I think it is in the 

ballpark of 50 total. 

Mr. BACHUS. The cases you cite, you talk about a 30 to 50 percent return rate or chargeback. That is pretty doggone high. I 

mean, that would alert anyone to something unusual going on. 

How did you come up with that 30 to 50 percent? 

Mr. DELERY. So I referred to the merchants that are identified 

in the Four Oaks complaint. So there were more than a dozen merchants that Four Oaks knew about that had a return rate of over 

30 percent. One was 70 percent? 

Mr. BACHUS. Yeah, Wachovia, First Bank of Delaware, Four 

Oaks, I mean they all had return rates of 30 to 50 percent. 

Mr. DELERY. Exactly, and Wachovia and First Bank of Delaware 

I think are also good examples, and the payment processor that 

was charged in connection with Wachovia, those are the prior cases 

that are—— 

Mr. BACHUS. Right. And you have highlighted that. I mean, 

Wachovia, First Bank of Delaware, all had these high return rates 

and chargebacks. And I am acknowledging that ought to be a red 

flag. But I notice your document request has a different return 

rate. It is 3 percent. It says that any customers’ accounts that experience a return rate of 3 percent or greater in any 1-month period. 

So suppose you had someone that sold ammunition, magazine subscriptions, tobacco, firearms, coin shops, and they have had one 

check returned out of 25. That would put them under this category. 

Why did you go from 30 to 50 percent to 3 percent? Three percent not over a year, but 3 percent in any 1-month period, which 

actually could be 3 checks within 1 month for somebody that did 

100 checks. They could have three returned checks in a year fall 

under that. 

Mr. DELERY. The 3 percent number comes from some of the information requests. That is not something that we viewed as a threshold for fraud and is not the basis for a charge. 

Mr. BACHUS. But in your document request it says, number 6, on 

page 6. 

Mr. DELERY. Right. In some of them we asked for information 

about returns over that number which was more than twice the average according to the industry groups. That was not intended to 

reflect—— 

Mr. BACHUS. And some industries are going to have a higher return rate. I mean, magazine subscriptions, there is nothing necessarily fraudulent about that. 

I guess what I am saying, you are asking financial institutions 

to go through and find out any customer they had that had 3 percent of their checks return in 1 month that did any of these ‘‘highrisk’’ businesses. 

Mr. DELERY. I think that in connection with requests that we 

make, we often have a discussion about the scope and what information they can provide in the way that a recipient—— 
117 

Mr. BACHUS. Well, but you asked all of them that. Then they 

have to hire lawyers. Then they have to have these discussions 

with you? And a small payday lender or ammunition seller or 

somebody selling tobacco, I mean, they have got to hire a lawyer, 

they have got to come to you, they have got to come to you and say, 

hey, can we? Do you ever modify that 3 percent? 

Mr. DELERY. My understanding is that there were discussions 

with some of the recipients about the scope and, again, what information they had that could be provided and what would be appropriate. So, again, that is a standard approach in—— 

Mr. BACHUS. But in fact in 4 it says, documents sufficient to 

identify payment processors or merchants or clients that experienced a return rate of 3 percent or greater in any 1-month period. 

Don’t you think that is pretty low? That is a pretty wide net. I 

mean, that is a pretty wide net, isn’t it? 

Mr. DELERY. Again, that was a request for information that was 

set at a level that was double the industry average, as I understand it. 

Mr. BACHUS. But in all your testimony you have highlighted companies that had—3 percent is not evidence of fraud, is it? 

Mr. DELERY. I agree with that. 

Mr. BACHUS. Okay. 

Mr. DELERY. And we have not viewed it as that. 

Mr. BACHUS. Right. 

Mr. DELERY. I thinkit was an effort to find information. 

Mr. BACHUS. But you are going down to 3 percent, but you admit 

that 3 percent in 1 month is not evidence of fraud. 

Mr. DELERY. Not that amount per se. We don’t have a absolute 

threshold for that. 

Mr. BACHUS. Okay. Thank you. Well, it is an absolute—I mean, 

it is in your subpoenas, it is 3 percent. 

Mr. DELERY. As a request for information, that is correct. 

Mr. BACHUS. Well, it is a subpoena, it is a subpoena, it is a legal 

document that the bank has to go out and find all these people. 

You agree that banks like to avoid risk, right? 

Mr. DELERY. I mean, that would be my understanding. 

Mr. BACHUS. And they avoid it by de-risking. And in this case 

I am not saying you purposefully, personally wanted to have these 

banks jettison these clients, but they are going to avoid risk. You 

send them something, you attach a list of different businesses. 

And it is also interesting that this list from the—I apologize. 

That is Rachel at Card Services. I would love for you all to go after 

them. 

The ones that you highlighted actually in this thing you attached, and this was a document I guess you all prepared because 

you refer to the FDIC, you just talk about examples. And you use 

tobacco sales, pharmaceutical sales, payday and subprime loans, 

pornography, magazine subscriptions. 

But, General, some that you didn’t include were escort services 

or drug paraphernalia, which was on the original list. So kind of 

interesting that Ponzi schemes, pornography, you didn’t include 

those, you included firearm sales, ammunition sales. Kind of interesting. How did you highlight that over pyramid schemes, pornography, or escort services? 
118 

Mr. DELERY. So, Congressman, these materials were prepared by 

the FDIC for their own regulatory purposes. And to my knowledge, 

the Department of Justice did not participate in choosing the examples. 

Mr. BACHUS. When you attach this to your subpoena don’t you 

realize that sends a message? 

Mr. DELERY. Well, I think that it is important, if I could, to clarify again, that doing business with any particular industry, whether on a high-risk list of a regulator or not, was not the basis for 

receiving any of the subpoenas. We selected the recipients of the 

subpoenas because we had reason to believe that the recipients had 

evidence of fraud that was being conducted by either a financial institution or somebody else against a consumer. And the sources of 

information were prior investigations into fraudulent merchants or 

cooperating witnesses. 

Mr. BACHUS. Yeah, I think when you issue a subpoena to a bank 

and you say, we are looking for fraud, and you say, ammunition 

sales, firearm sales, payday lending, you have to acknowledge that 

many banks said they have cut these folks loose. Tobacco sales. 

Mr. DELERY. Congressman, I think it is also important to note 

that we have, in response to questions, taken a number of steps to 

make clear to the industry and to the public what we are and are 

not doing. And so, going back to last year, we have met with industry groups, we have communicated with them, we have written to 

Members of Congress to make clear that doing business with any 

particular industry we don’t view as evidence of fraud. 

And so I do think we take seriously the questions of effects on 

other institutions and have therefore been working publicly and 

with industry to explain what we are and are not doing To avoid 

that kind of result. 

Mr. BACHUS. My Democratic colleagues have said they want to 

wrap this up. So let me just simply say to you that this is having 

the effect of shutting down these companies, whether that was intended or not. So thank you. 

Mr. JOHNSON. Mr. Chairman? 

Mr. BACHUS. Oh, you have another question. Sure. 

Mr. JOHNSON. I would ask you to yield to me for a couple of questions. 

Mr. BACHUS. Sure. I am sorry, two questions, or however many 

questions. 

Mr. JOHNSON. The National Automated Clearing House Network 

Association, which governs the ACH Network through its self-regulatory operating rules, has repeatedly referred to banks as the 

gatekeepers of the ACH Network. Do you agree with that characterization of banks? Yes or no? 

Mr. DELERY. I certainly agree that merchants need access to the 

banking system through a financial institution, if that is what that 

means. I am not familiar with that. 

Mr. JOHNSON. And the ACH Network connects more than 12,000 

financial institutions while over $40 trillion in value is supported 

annually through the ACH Network representing more than 22 billion transactions. And the average rate of returns or chargebacks 

is less than 1.5 percent on the ACH Network. Please discuss 
119 

whether higher return rates trigger certain diligence requirements 

for banks and payment processors. 

Mr. DELERY. Well, certainly, Congressman, I think that among 

the evidence that we look to in evaluating fraud, particularly high 

return rates would be in that category as reflected in the Four 

Oaks case. Again, our cases are based on situations not just where 

a financial institution unwittingly processes a fraudulent transaction, but where they knowingly allow fraudulent merchants to 

access the payment system through their institution or deliberately 

look the other way against evidence of fraud, for example, by having a control in place and then turning it off to avoid seeing the 

answer. And a high return rate could be and has been, for example, 

in the Four Oaks case, evidence of repeated fraudulent withdrawals by consumers. 

And I do think it is important to remember that at bottom these 

cases are about fraud against consumers. They started by noting 

the endless variety of fraud, different types of scams that consumers face all across the country, and by following where the 

money went from those scams to particular banks and payment 

processors that are not following the rules. 

Mr. JOHNSON. And an indication that the rules are not being following is a high rate of return. And the industry standard is about 

1.5 percent. Isn’t that correct? 

Mr. DELERY. Yes, that is my understanding. 

Mr. JOHNSON. And the subpoena that my friends from the other 

side keep referring to puts the institution to which the subpoena 

was directed on notice that a 3 percent return rate is something 

that they should pay attention to. 

Mr. DELERY. I guess the way I would say it, Congressman, is 

that some of the subpoenas asked for return rates over 3 percent, 

that that would be twice the ordinary average. Again, we did not 

view and do not view that level as evidence of fraud. The type of 

return rates we are talking about in Four Oaks, 30-plus, up to 70 

percent, would be evidence of fraud. 

Mr. JOHNSON. A 70 percent return rate would certainly authorize 

a civil action against that particular institution. 

And with that I will—— 

Mr. BACHUS. And you have no debate for anyone on that. 

And let me close by saying, the Democratic Senator from Hawaii, 

11 members of Financial Services, Democrats, have written expressing their concerns over legitimate businesses being shut down. 

And I will close by just, I want to read this to you, just to say 

go back, consider this. Powder Horn Outfitters sells shooting, archery, and fishing equipment in Hyannis, Massachusetts. It was recently turned down for a loan by its longtime bank. Powder Horn’s 

owner says this. He cites Operation Choke Point. ‘‘Our loan was 

turned down not because of our credit. We had perfect financials 

and had been working with the same manager for 20 years. It was 

just because question sell guns, and they said that to us specifically, you sell guns.’’ So it is having that effect. 

Mr. DELERY. And, Mr. Chairman, hopefully this hearing, among 

other things, helps to explain our position that that is not the basis 

of the actions that we are bringing. We will continue our efforts to 

make clear what our policy is, which is to pursue fraud. 
120 

Mr. BACHUS. Hopefully you will take some of our concerns, like 

this 3 percent and others, into consideration, because I know that 

a lot of companies that are losing their bankers. Three percent in 

1 month. And you said and I have said that in certain industries 

3 percent is not that unusual. There are industries that deal with 

certain demographics, the average is 1.5, there are going to be 

stores in certain areas that are going to have 3, 4 percent, particularly in 1 month. 

Consumer fraud is real. Go after that, not after an archery store. 

Thank you. 

Mr. DELERY. Thank you. 

Mr. BACHUS. And you are dismissed. And we appreciate your testimony and your candor. 

Mr. BACHUS. Good morning. So this is our second panel, and we 

have an esteemed group of witnesses, starting out with Professor 

Levitin, Adam J. Levitin, Georgetown University Law Center. 

Professor Levitin is a professor at Georgetown University. That 

pretty much goes without saying, doesn’t it? But he specializes in 

bankruptcy, commercial law, and financial regulation. His research 

focuses on consumer and housing finance payments and debt restructuring. 

He currently serves on the Consumer Financial Protection Bureau’s Consumer Advisory Board, and he has previously served as 

the Bruce W. Nichols Visiting Professor of Law at Harvard Law 

School, and the Robert Zinman Scholar in Residence at the American Bankruptcy Institute, and the Special Counsel to the Congressional Oversight Panel for the Troubled Asset Relief Program. 

Prior to joining the Georgetown faculty, Professor Levitin practiced in the Business Finance and Restructuring Department of 

Weil—is that Gotshal? 

Mr. LEVITIN. Weil, Gotshal. But if you would like to curtail the 

biography. There is no reason everyone here needs to hear it. 

Mr. BACHUS. Okay. And Weil, Gotshal & Manges? 

Mr. LEVITIN. That is right. 

Mr. BACHUS. LLP. And served as law clerk to the Honorable 

Jane R. Roth on the United States Court of Appeals for the Third 

District. 

Professor Levitin received his JD from Harvard Law School, a 

masters in—is that philosophy? 

Mr. LEVITIN. It is actually an M.Phil in history. 

Mr. BACHUS. Okay. 

Mr. LEVITIN. You are going to make my mom very proud. 

Mr. BACHUS. And an AM from Columbia University, and an AB 

from Harvard College. His scholarship had won several awards, including the American Law Institute’s Young Scholar’s Medal. 

We welcome you. 

Mr. Scott Talbott, senior vice president of government affairs at 

the Electronic Transactions Association. He is responsible for developing and executing ETA’s Federal and State legislative and regulatory strategies on behalf of ETA’s more than 500 member companies. 

Prior to joining ETA, Mr. Talbott served senior vice president for 

public policy at the Financial Services Roundtable where he directed the overall policy strategy, managed the daily legislative and 
121 

regulatory advocacy efforts, and directed communications. Mr. 

Talbott also served as counsel to the organization and managed the 

Roundtable’s political action committee. 

He has received numerous accolades in his tenure, including 

being named the top lobbyist by the Hill in both 2009 and 2011, 

as well as a winner for his work during the economic collapse of 

2008 by the Washingtonian magazine. 

In 2010 he appeared in the Oscar winning film ‘‘Inside Job.’’ So 

you are a movie star, right? How about that. I didn’t know that, 

Scott. Once named NPR’s favorite bank lobbyist. He is a frequent 

contributor to both national and international media. 

He joined the Roundtable in 1994 after working in the tax department’s of Arthur Anderson and Ernst & Young. He received his 

BA from Georgetown University cum laude and his JD from George 

Mason University School of Law. So we have two Georgetown professors and a student. 

Mr. David H. Thompson, managing partner, Cooper & Kirk. Mr. 

Thompson is a managing partner at that firm and joined the firm 

at its founding. Mr. Thompson has extensive trial and appellate experience in a wide range of matters. In commercial matters Mr. 

Thompson has had significant trial experience in litigating large 

claims for plaintiffs and defendants. 

Serving as the de facto general counsel to several private companies, Mr. Thompson has developed significant practical business experience. Mr. Thompson has taken hundreds of depositions of senior executives, expert witnesses, high-ranking government and university officials, employees, and union leaders. 

So you know how much subpoenas can cost, right? 

Mr. THOMPSON. Yes, sir. 

Mr. BACHUS. Thank you. 

Mr. Thompson also has extensive experience in constitutional 

litigation. Mr. Thompson has litigated numerous cases involving 

freedom of speech, civil rights, voting rights, taking of property, 

Second Amendment and separation of powers issues. 

Ah, Mr. Thompson also served as an adjunct faculty member at 

Georgetown University Law Center and a visiting professor at the 

University of Georgetown Law School, D.C. campus. 

Mr. Thompson received his AB degree magna cum laude from 

Harvard University and received his JD degree cum laude from 

Harvard Law School. 

All right, we finally have a witness that doesn’t have a Georgetown, Harvard background here. 

Our last witness is Mr. Peter G. Weinstock? 

Mr. WEINSTOCK. Weinstock, yes, sir. 

Mr. BACHUS. Weinstock. A partner at Hunton & Williams LLP. 

His practice focuses on corporate and regulatory representation of 

small to large regional and national financial institution franchises. 

During the past several years Peter has devoted substantial time 

to regulatory law enforcement and internal investigations of financial institutions. He is co-practice group leader of the Financial Institutions Section. He has counseled institutions on more than 150 

M&A transactions, as well as provided representation on security 

offerings and capital planning. 
122 

Mr. Weinstock has authored numerous articles in bank publications. His article ‘‘Acquisitions of Failed Banks Present Risk and 

Opportunity’’ was honored by the RMA Journal in 2011. He has 

spoken at over 150 banking conferences and seminars and is recognized at a top speaker and writer in his field. 

He received his BA from State University of New York and his 

J.D. From Duke University School of Law. He is a member of the 

Texas Bar. 

Mr. WEINSTOCK. Better basketball, Mr. Chairman, than Georgetown University. 

Mr. BACHUS. You did what? 

Mr. LEVITIN. Object. 

Mr. WEINSTOCK. Better basketball than Georgetown University. 

Mr. BACHUS. At Duke. That is right. Georgetown is kind of a 

whipping boy for Duke. Recently. All right. 

Each of our witnesses’ written statements will be entered into 

the record in its entirety. 

And I am not going to ask you to restrict it just to 5 minutes. 

So if you want to take a little longer, don’t feel rushed. But, anyway, you will see a light will turn red and kind of begin to wrap 

it up then. 

All right. At this time Mr.—Professor Levitin, we will start with 

you. 

TESTIMONY OF ADAM J. LEVITIN, PROFESSOR OF LAW, 

GEORGETOWN UNIVERSITY LAW CENTER 

Mr. LEVITIN. Good morning, Mr. Chairman Bachus, Ranking 

Member Johnson, and Members of the Subcommittee. Thank you 

for inviting me to testify today. 

Criticism of Operation Choke Point reflect a lack of understanding of payment systems, in general, and the Automated 

Clearing House, or ACH, payment system in particular. 

Critics of Operation Choke Point claim that the Department of 

Justice has overstepped its legal authority under FIRREA, which 

is predicated on crimes that affect Federally insured financial institutions. 

Operation Choke Point’s critics claim that consumer frauds do 

not affect financial institutions. They are wrong. When a bank 

transmits a payment request in the ACH system, the bank warrants that the request was authorized by the consumer and that 

the requester complies with the laws of the United States. 

This means that banks are vouching for the legitimacy of the 

payments in the ACH system. When payments turn out to be unauthorized or illegal, banks have liability. A similar situation exists 

for credit and debit card payments where banks are on the hook 

for chargebacks that merchants are unable or unwilling to pay. 

Consumer fraud very much affects Federally insured financial institutions. Accordingly, Operation Choke Point is squarely within 

the Department of Justice’s statutory authority under FIRREA. 

Now, you may hear that the Department of Justice is abusing 

the concept of reputational risk. But I would note that there is a 

single mention of reputational risk in the only complaint filed in 

Operation Choke Point, that—the complaint against Four Oaks 

Bank. 
123 

Whatever issues there are with the concept of reputational risk, 

they do not at this point appear to be part of Operation Choke 

Point, and I think we should be very careful not to conflate the Department of Justice’s civil investigation of specific fraud with other 

regulatory activity by prudential regulators. I think it is important 

that we keep them separate. 

Critics of Operation Choke Point have also argued that the Department of Justice is trying to shut down legitimate, but 

disfavored, industries. This concern is unfounded. 

Operation Choke Point focuses on banks that choose to process 

transactions that they know are fraudulent or that willfully ignore 

clear evidence of fraud. Operation Choke Point is about ensuring 

the banks comply with their anti-money laundering operations. 

The basis for the Department of Justice’s suit against Four Oaks 

Bank was that Four Oaks did not have reasonable controls in place 

and ignored the presence of really glaring red flags indicating illegal activity. 

That said, there are objective measures of industries with higher 

consumer fraud rates, namely, the rate of ACH transactions that 

are returned as unauthorized. When dealing with these industries, 

banks cannot be lax in anti-money laundering compliance, and they 

may need to conduct further diligence. 

Now, this does not mean that banks need to look through every 

image on a customer’s porn Web site to see if there is child pornography or examine every payday loan for a Military Lending Act violation or ensure that every firearm sold by a customer is not sold 

to a convicted felon. 

But banks do need to take reasonable steps to determine that 

their customer is doing a legitimate business and these are legitimate industries, but banks have to verify what the business actually is and not to ignore red flags like high unauthorized transaction return rates, high volumes of consumer complaints, or false 

representations of U.S. domiciles, was the case in Four Oaks Bank. 

This is not making the banks cops. Instead, it is just emphasizing that banks cannot willfully turn a blind eye to illegal activity. 

Concerns about spillover effects are also overstated. There are 

anecdotes, but no verified evidence of Operation Choke Point affecting legitimate businesses. There are no verified cases of banks terminating customer accounts because of Operation Choke Point. 

Payday lenders have been having problems with bank account 

terminations for over a decade. In 2006, payday lenders testified 

about this to Congress. This is a problem that predates Operation 

Choke Point. 

But even if Operation Choke Point were resulting in account terminations, it is not clear why this would be a problem, per se. 

Compliance with anti-money laundering regulations has costs, and 

that is especially true in dealing with high-risk businesses. Some 

banks may very well rationally decide that it isn’t worthwhile to 

serve these businesses. 

For other banks, however, Operation Choke Point is a business 

opportunity. Some of our nearly 7,000 banks will serve these highrisk businesses, but they will do so at a higher price, and this is 

just the free market at work. 
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In other words, Operation Choke Point might result in higher 

costs of banking services for higher risk merchants. There is nothing wrong with that. Banks should be pricing for risk, and highrisk merchants should have to pay their own freight. 

The thing is high-risk merchants don’t want to pay higher costs. 

They would rather be subsidized by getting a pass from anti-money 

laundering laws. And that is what they are here asking you for. 

There is no reason that we should be subsidizing high-risk businesses like escort services, payday lenders, pornographers, or purveyors of racist material. Yet, pressuring the Department of Justice 

to back off Operation Choke Point is an attempt to subsidize these 

high-risk businesses, and it is an attempt to do so that comes at 

the expense of homeland security. Congress shouldn’t be doing 

that. 

Operation Choke Point is a legitimate exercise of the Department 

of Justice’s authority under FIRREA to investigate and prosecute 

frauds affecting Federally insured financial institutions. Banks 

need to take their anti-money laundering responsibilities seriously. 

Operation Choke Point should be applauded, not criticized. 

Thank you. 

[The prepared statement of Mr. Levitin follows:] 
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Mr. BACHUS. Thank you. 

Mr. Talbott. 

TESTIMONY OF SCOTT TALBOTT, SENIOR VICE PRESIDENT OF 

GOVERNMENT AFFAIRS, THE ELECTRONIC TRANSACTION 

ASSOCIATION 

Mr. TALBOTT. Chairman Bachus, Ranking Member Johnson, 

Members of the Subcommittee, my name is Scott Talbott. I head 

up government affairs for the Electronic Transactions Association. 

ETA appreciates the opportunity to participate in the Subcommittee’s hearing on the Operation Choke Point. 

ETA is an international trade association representing companies 

primarily involved in all aspects of electronic payments. We focus 

on credit cards, debit cards, and prepaid cards. In 2013, we processed over 100 billion transactions for about $5 billion worth of 

goods and services. We are the choke in Choke Point. 

In summary, the ETA strongly supports vigorous enforcement of 

existing laws and regulations to prevent fraud, but we believe that 

Operation Choke Point is the wrong execution of the right idea. 

The payments industry has always been committed to fraud. It 

is part of what we do. And I am not here to defend fraudulent actors. 

Consumers in the United States choose electronic payments over 

cash and checks because they have zero liability for fraud. And the 

cost of that fraud is generally borne by ETA members. So ETA 

members commit massive amounts of resources in time and money 

into detecting and eliminating fraud. 

Every participant in the payment system has developed effective 

due diligence programs to both prevent fraudulent actors from accessing the payment system and to terminate access from fraud is 

determined. For example, last year, 5 percent of merchant applications were denied and ETA members terminated more than 10,000 

fraudulent merchants. 

As you know, fraud never stops. It never sleeps. And so the industry can—must continuously develop new techniques to fight it. 

With the expansion and ubiquitousness of the Internet, that creates new challenges. As we build a 10-foot wall, the crooks build 

an 11-foot ladder. 

So, in response, ETA developed new guidelines that we have put 

out for the entire industry, not just ETA members, that represent 

100 pages of due diligence designed to increase the underwriting 

methods and enhance the ability of the industry in this new day 

and age to detect and eliminate fraud. 

These guidelines are drawn based on existing rules that exist 

both at individual companies and across the payments ecosystem, 

and they also draw from Operation Choke Point. It is part of the 

regulatory environment that we operate in. And so we have included many references and similar concepts in the guidelines. 

Our concerns with Operation Choke Point are that it neglects the 

payments industry’s efforts in this area to detect and eliminate 

fraud. It creates a confrontational approach that has a chilling effect on the payments industry’s ability and willingness to report 

fraudulent merchants to law enforcement mainly because the pay-
139 

ments industry believes that they may be subject to enforcement 

action if they do report. 

And this harms three categories of merchants. One, we have seen 

evidence of companies dropping whole classes of merchants. We see 

increased costs for merchants, not just those in high-risk categories, but across the system. And we see—we could see a restriction of access to the payment system in the future for new merchants trying to gain it. 

What our main particular focus is with Choke Point, what our 

main concern is, is that regulators and law enforcement agencies 

seem to be changing the long-standing policy of only focusing on 

those payment companies who have actively engaged in fraud. 

It appears that OCP is—Operation Choke Point is trying to hold 

law-abiding payment companies liable for something as simple as 

a high return rate or simply providing merchants access to the payment system. If this is the case—and this is our fear, that the consequences I just mentioned will come to bear. 

The Operation Choke Point is not just limited to—as everyone 

knows, to Department of Justice. Other regulators and law enforcement agencies appear to be getting into the game or adopting similar approaches. For example, ETA members have received communications from the FTC with Operation Choke Point-like questions 

involved. 

We believe there are more targeted and more efficient ways to 

detect and eliminate fraud. The payments industry makes a better 

partner than a target in this effort. A cooperative approach, like 

combining self-regulatory efforts, like the ETA’s guideline, are 

more likely to strike the right balance than the blunt law enforcement action contained in Operation Choke Point. 

Another idea is to create a reasonable safe harbor that would 

allow law-abiding payment companies to report fraudulent merchants to law enforcement without fear of triggering an enforcement action. 

ETA stands ready to work with regulators and law enforcement 

toward our common goal of detecting and eliminating fraud. 

Thank you again for the opportunity to testify before the Subcommittee, and I welcome any questions you may have. 

[The prepared statement of Mr. Talbott follows:] 
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Mr. BACHUS. Mr. Thompson. 

TESTIMONY OF DAVID H. THOMPSON, 

MANAGING PARTNER, COOPER & KIRK, PLLC 

Mr. THOMPSON. Mr. Chairman, Ranking Member Johnson, and 

Members of the Subcommittee, thank you very much for including 

me on this panel today. 

The Department of Justice, working with the FDIC, the OCC, 

and the Fed have conspired to choke off and strangle legitimate 

businesses by depriving them of access to the financial system. 

Many of the victims of Operation Choke Point are legitimate businesses. 

These agencies have undertaken this operation without any Congressional authorization and, although they may disapprove of 

these industries, neither the FDIC nor the OCC nor the Fed have 

any power to shut down lawful businesses. They can ensure the 

safety and soundness of banks, but they have no authority to condemn wholesale lawful industries. 

To make matters worse, the Department of Justice and the banking agencies have failed to provide these law-abiding companies 

with any opportunity to be heard and to defend themselves. Instead, they have acted through back-room—a back-room campaign 

of veiled threats and regulatory intimidation. 

I come to you today on behalf of the Community Financial Services Association of America, the leading trade association for shortterm credit providers, and its members have been targets of Operation Choke Point. 

It is important to understand the mechanism by which these 

agencies have brought about their desired result. The banking 

agencies have targeted disfavored industries by expanding the definition of reputational risk. This is the club that they yield and 

wield. 

The agencies had previously and consistently defined the concept 

of reputational risk to refer specifically to the risk of a bank’s reputation that arose from its own services and its own products. A 

bank’s reputation could suffer, in other words, if it provided substandard products or services. 

But the agencies had never before held—said that a bank needed 

to assess the reputation of its customers as part of its management. Banks ensured their good reputation by meeting the needs 

of their customers, not by judging the popularity of their customers. 

This is, of course, not to say that a bank had no need to evaluate 

its customers. A bank is required to have procedures in place that 

ensure that it does not engage in illegal activity or facilitate the 

commission of crimes by its customers. This risk is encompassed 

under the rubric of compliance risk, however, not that of reputation 

risk. 

A bank was never required before to have procedures in place to 

ensure that it did not have customers who, though lawfully engaged in demonstrably lawful businesses, might simply be unpopular with the public or with the current Administration. 

In imposing this new interpretation of reputation risk upon the 

banking industry, the agencies have consistently chosen to proceed 
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without providing the public with notice and an opportunity to 

comment, and this is a fatal flaw in this regulatory regime. 

It violates the Administrative Procedures Act. It violates the due 

process clause. And these violations have real-world consequences. 

Members of the association I represent have had scores of banking 

relationships severed in the aftermath of Operation Choke Point. 

And the key point to understand is that these relationships have 

been long-standing. They have harmoniously coexisted with safety 

and soundness requirements and anti-money laundering regimes. 

And now over 80 banks have severed these relationships. Lightening might strike in the same place twice on occasion, but it 

doesn’t strike 80 times over and over and over again by coincidence. 

And something has changed. It is not the return rates of the 

short-term lending industry. It is not their return—their risk profile. There is nothing in the free market that has changed. It is Operation Choke Point that has changed. That is the driving force behind these decisions. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Thompson follows:] 
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Mr. BACHUS. Thank you, Mr. Thompson. 

Mr. Weinstock. 

TESTIMONY OF PETER WEINSTOCK, 

PARTNER, HUNTON & WILLIAMS LLP 

Mr. WEINSTOCK. Chairman Bachus, Ranking Member Johnson, 

and Members of the Subcommittee, the U.S. Department of Justice 

created Operation Choke Point ostensibly to combat consumer 

fraud. However, it has become apparent that the program instead 

seeks to irradiate disfavored business. 

To do so, the program uses aspects of FIRREA to threaten injunctions and civil penalties against banks that provide access to 

the payment system for certain merchants and payment processors 

to whom they provide services. 

Without access to the banking and payment systems, these entities are unlikely to continue operating. This was precisely the 

DOJ’s goal from the outset. 

Banks are disassociating with customers engaged in lawful behavior, not simply customers whose activities may be fraudulent, 

as bankers try to define the next targets of the DOJ’s efforts. 

The DOJ even acknowledged the prospects for such parties’ 

banking relationships to be collateral damage to its initiative. 

With Operation Choke Point, the DOJ is starting from the 

premise that certain lines of business or industries are anathema 

and then working backward to find legal violations. 

Using FIRREA to implement Operation Choke Point, the government can issue subpoenas, take depositions, and seek civil damages 

against entities committing wire fraud or mail fraud, affecting Federally insured depository institutions. In doing so, the DOJ need 

only meet the lower evidentiary burden of proof by a preponderance of the evidence to demonstrate fraud. 

The DOJ’s objective, however, is not to bring any action against 

those suspected of committing fraud, but to cause banks to ‘‘scrutinize their account relationships and, if warranted, to terminate 

fraud-tainted processors and merchants.’’ 

As a result of the DOJ’s use of FIRREA, banks have been forced 

to choose between, at a minimum, incurring significant discovery 

and compliance costs and potentially accepting costly penalties, on 

one hand, or terminating existing relationships with processors and 

merchants, on the other hand, even if they are operating lawfully. 

The DOJ has calculated the bank’s sensitivity to the costs of responding to the DOJ’s inquiries, let alone to civil and criminal liability and regulatory action. Their goal is to cause a bank to ‘‘scrutinize immediately its relationships with processors and fraudulent 

merchants and to take necessary action,’’ i.e., to cut them off. 

In Operation Choke Point, the determination of whether a merchant is fraudulent is determined by the DOJ based on a line of 

business rather than by any adjudication where those who are accused are afforded due process. 

DOJ believes that legitimate banks will become aware of perhaps 

unrecognized risks and corrupt banks will be exposed. In other 

words, a bank that does not agree with the DOJ’s assessment, perhaps based only on return rates and violations of State laws which 
169 

the DOJ concedes is only a red flag of potential fraud, will deem 

to be corrupt and subject to legal action. 

Operation Choke Point has had a chilling effect on banks’ willingness to transact business with processors and merchants where 

the reward cannot compensate enormous costs and potential exposure. 

FIRREA was passed in response to the savings and loan crisis. 

The goal of FIRREA was to make those who committed outright 

fraud and insider abuse against depository institutions pay the 

price for those actions. The DOJ is clearly stretching the limits of 

FIRREA in the context of Operation Choke Point. 

With the current analysis by the DOJ, intent is turned on its 

head. Instead of using FIRREA to protect banks from fraud, the 

DOJ is prosecuting banks for conduct disfavored in businesses that 

are disfavored using discovery and draconian subpoena power. Entities shut out of one bank have little hope of establishing a subsequent banking relationship and will become defunct without an opportunity to defend themselves. 

While I am not championing the efficacy of payday lending, there 

are undoubtedly some organizations that operate lawfully and provide un-bank customers with a service that such customers believe 

is valuable, certainly one less dangerous than engaging a loan 

shark. 

Indeed, a review of the development of Operation Choke Point reveals the DOJ’s new technique. As noted by internal memoranda 

on Operation Choke Point, the DOJ’s primary target is the shortterm lending industry. 

Brandishing FIRREA as a sword, DOJ chose to go after a number of banks that were doing business with third-party payment 

processors to get them to cease providing services to those entities. 

DOJ stunningly proposed identifying ten suspect banks for analyzing return rate data, among other criteria. However, the DOJ’s 

standard for identifying fraud was arbitrary and relied almost exclusively on NACHA average return rates and potential violations 

of State law. 

NACHA does not define a 3 percent level. NACHA does have a 

1 percent level for unauthorized transactions as an indicator of 

fraud. NACHA doesn’t have a level for not sufficient funds. 

The chilling effect of Operation Choke Point is not limited to 

DOJ actions. Instead, it is partially predicated on the notion that 

reputation risk arises when banks transact business with processors and high-risk merchants. What constitutes reputational risk, 

however, is not clearly defined. 

The FDIC issued a financial institution letter that explains reputation risk as a risk arising from negative public comment and 

adds any negative publicity involving the third party, whether or 

not the publicity is related to the institution’s use of the third 

party, could result in reputation risk. 

Sarah Raskin, Federal Reserve Board Governor, explained reputation risk in a speech as the risk to enterprise value from—to 

brand recognition and customer loyalty. Raskin further added that 

supervision of banks is necessary in order to prevent the accumulation of reputation risk to the extent it constitutes a hidden exposure. 
170 

These comments illustrate the vague and subjective standard 

now being wielded by the Federal Government against banks who 

are doing business with disfavored industry. The guidance plainly 

does not distinguish between lawful and fraudulent activity. 

Reputational risk is not legal risk. Regulatory authorities proffer 

no standard of how to evaluate whether, as Raskin states it, that 

reputation risk is accumulating and that any exposure is material 

to safety and soundness. 

The OCC and the Fed in the fourth quarter of last year issued 

guidance on third-party risk that requires financial institutions to 

risk-assess their customer base and to engage in extensive review 

of the compliance management systems of their customers. In effect, bankers now have to police their customers’ compliance management systems. 

This goes well beyond the BSA’s know-your-customer requirements. This gets into the burden on banks to police whether customer—disclosures to their customers are deceptive, whether customers are engaging in improper activity. 

Basically, they have to police all of their customers’ activities. 

What cost is that imposing on third parties? What cost when the 

third parties have to have bank-like compliance management systems? And what is that going to do to our economy? 

So, undoubtedly, there is a chilling effect going on. Bankers are 

trying to evaluate high-risk customers and then determine which 

of those will be next on the regulatory or government list and then 

terminate them. Bankers are making the business decision to derisk their customer base accordingly. 

Thank you. 

[The prepared statement of Mr. Weinstock follows:] 
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Mr. BACHUS. Mr. Holding, recognized for questions. 

Mr. HOLDING. Thank you, Mr. Chairman. 

Mr. Thompson, thank you for your testimony. 

There is a little bit of a discrepancy amongst the panel here. In 

his testimony, Professor Levitin states that there are no verified 

cases of banks terminating accounts in direct reaction to Operation 

Choke Point. 

I heard you testify differently than that. So, if you could, please 

explain where that discrepancy comes from. 

Mr. THOMPSON. Sure. And perhaps it is definitional in terms of 

what we mean by Operation Choke Point. But what I mean by that 

is the coordinated effort by the Department of Justice, the FDIC, 

the OCC, and the Fed to target certain high-risk industries. 

And this is what we saw in that subpoena and the attachment 

to the subpoena. And if that is what we mean by it, we have heard 

numerous instances of banks saying, ‘‘We are getting out of’’—‘‘We 

are exiting this relationship,’’ relationships that often extend over 

a decade, almost 2 decades. 

And there has been no indication that there was a concern about 

the risk profile, that anything had changed in the risk profile of the 

short-term credit lender. Rather, it was regulatory pressure. That 

is what we are hearing, regulatory pressure, and it is clear that it 

is Operation Choke Point. 

Mr. HOLDING. And you are in the business of representing similarly situated entities on a daily basis. Correct? 

Mr. THOMPSON. Yes. That is right. 

Mr. HOLDING. The—you know, talking about these subpoenas, 

again drawing on your experience as a practicing attorney in this 

field, the—take a minute and walk through, you know, what happens when a client gets a subpoena like this. You know, what is 

the ripple effect? And, ultimately, at the end of day, you know, 

what does it cost them to respond? 

Mr. THOMPSON. Well, it is a very significant cost in any number 

of respects. It starts with just answering the subpoena, which 

means retaining lawyers, number one. 

Number two, typically, then these subpoenas are looking for 

emails. The cost of production can be hundreds of thousands of dollars just in computer resources to do an email sweep and then to 

produce, depending upon the volume of material that is sought. 

And often, of course, the subpoena is a prelude to further investigation, which would cost—could cost millions of dollars. And then 

you layer on top of that the bad publicity that comes from receiving 

this, the investigation. 

There is enormous pressure on the institution to make it—the 

pain stop. And I suspect, although I don’t know, that that is one 

of the reasons we see 50 subpoenas being issued, but only one case 

being—having to be filed, because there is huge asymmetric pressure when the government issues a subpoena on a recipient to try 

to make the pain stop. 

Mr. HOLDING. So if you are a financial institution, I mean, you 

are always looking at the bottom line, doing a cost-benefit analysis. 

Whether you take on a client or retain a client, you know, you certainly do a risk analysis as to whether they will be able to repay 

their loans, whether they will be a profitable customer. 
177 

But then you add into that—you know, if they fall into one of 

these high-risk categories, as enumerated by the FDIC, the—you 

look at that and say, ‘‘You know, it could cost me a lot of money 

to have this person as a client.’’ Correct? 

Mr. THOMPSON. You are absolutely right. 

And it is not limited just to that. Because, as one of the panelists—or Members of the Subcommittee indicated earlier, regulators 

have a lot of different ways to apply pressure on a financial institution. 

So, yes, you are right. The dollars and cents are huge. The negative publicity is very significant. But, also, you want to try to stay 

on the right side of your regulators. And if you defy them, they 

have innumerable ways to get even with you. 

Mr. HOLDING. Thank you. 

Mr. Chairman, I yield back, in light of the vote. 

Mr. BACHUS. Thank you. I appreciate that, Mr. Holding. 

Do you want to go ahead and begin to ask one or two questions 

and then we will break in maybe 2 minutes? We have 3 minutes 

left on the floor. Or do you want to come back? 

We will wait. 

We would like to come back. Are any of you all under a time restraint? 

All right. We will—there are two votes on the floor? 

Mr. JOHNSON. That means everybody is on the clock? 

Mr. BACHUS. I think that may be probably 30 minutes. Why don’t 

we do this. Why don’t we come back at 10 till. Is that all right? 

Or 15 till? That will give you a chance to get something to eat. We 

are going to come back at 15 till. Probably won’t come back. Let’s 

say 20 minutes. 20 minutes. 

Mr. WEINSTOCK. How long do you think we will go from there, 

Mr. Chairman? 

Mr. BACHUS. 20 minutes max. We will be out of here by 1:00, 

1:15. 

Mr. WEINSTOCK. Thank you. 

Mr. BACHUS. Is that okay? 

Mr. WEINSTOCK. I am not on the clock. 

Mr. BACHUS. Oh, no. Okay. So you are not getting paid right 

now. 

Mr. WEINSTOCK. I am here of my own volition. 

Mr. BACHUS. We will try to get you out of here pretty quick. 

Mr. WEINSTOCK. Thank you, Mr. Chairman. 

Mr. BACHUS. Of course, a professor gets paid by teaching classes. 

So he is a little better—— 

We will recess at this point. 

[Recess.] 

Mr. BACHUS. The Subcommittee will come to order. 

My first question will be for Mr. Weinstock. 

Mr. WEINSTOCK. Yes, sir. 

Mr. BACHUS. Well, actually, no. That question has been asked. So 

George asked that question. I just saw where I marked it off. 

Mr. Talbott, people might be skeptical of the idea of an industry 

policing itself. Are there any economic incentives that explain why 

one could expect that the payment industry would do a good job of 

fighting fraud? 
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Mr. TALBOTT. Sure. Thank you, Mr. Chairman. Appreciate the 

question. 

Because fraud, in case of credit card or debit card, that is visited 

upon the consumer comes bank to not the consumer—the network 

rules prohibit banks or processors from charging the customer—because that fraud comes back to the payments industry, we have to 

bear the cost of that fraud. 

We have a direct pecuniary interest ensuring that fraud is kept 

off the system. So in addition to it being good public policy, it is— 

comes directly out of our bottom line. So we have every incentive 

to ensure that fraud stays off the system. 

Mr. BACHUS. All right. Thank you. 

Mr. WEINSTOCK. Mr. Chairman, can I add a comment? 

Mr. BACHUS. Yes. 

Mr. WEINSTOCK. One thing people don’t realize is NACHA applies fines very quickly if there are unauthorized transactions and 

the bank can’t show proof that the customer authorized the transaction. 

After three, four instances, that equals a fine of over six figures. 

So it is not like it is a toothless exercise. If they don’t pay the fines, 

they can get kicked out NACHA. 

Mr. BACHUS. Okay. Thank you. 

Mr. LEVITIN. Mr. Chairman, if I may add, I agree with all of 

that. But I think it is important to note that it is—only part, not 

all, of fraud costs come back to industry. 

Because what it—you don’t have perfect enforcement going on 

because a lot of consumers will just lump it on a small-dollar fraud. 

It is not worth complaining about $10 or $20 that are wrongfully 

debited. 

So when consumers complain, yes, the industry is at risk, but 

consumers often don’t complain about small-dollar frauds. 

Mr. BACHUS. Professor, same point that we are discussing. You 

did—I think in your testimony you were the one that covered the 

fact that—you said a payday lender is out of business if he—out 

of business or insolvent, the payday lender’s bank bears the loss, 

and that that is one reason—justification, you know, for—— 

Mr. LEVITIN. That’s correct. 

Mr. BACHUS. They can—but let me ask you this. You then went 

on and said banks already charge those merchants much higher 

fees for banking service precisely because of the risks they pose, 

over on page 11. 

So you—you know, you say that there is some risk, but then in 

another paragraph, you acknowledge that a bank can just set a 

higher fee. And you mention that there are a lot of businesses that 

just have higher return rates, I mean, as a—as a matter of just 

their business. So—— 

Mr. LEVITIN. Sure. Return rates do vary by industry. And it is 

important that we distinguish between absolute return rates and 

return rates because of unauthorized transactions. Not every return—ACH return is because of an unauthorized transaction. 

Mr. BACHUS. Yeah. And I agree with that. But, still, banks have 

an ability to adjust. 

Mr. LEVITIN. Oh, I agree completely, Mr. Chairman, and that is 

actually, I think, the important point, which is that, if Operation 
179 

Choke Point is imposing higher costs on high-risk merchants, there 

will be some banks—we have got almost 7,000 banks in the United 

States; it is far more than any other country has—there will be 

some banks that see this as a business opportunity and say, ‘‘Hey, 

archery store that got closed down, come to us. We are going to 

charge you more, but we will take your business. We will do the 

diligence on you. We can get comfortable with you. It is going to 

just cost you more.’’ 

And the market should correct this. You know, it may not be a 

perfect correction, but we should see a market correction. 

Mr. BACHUS. Let me say this to you. You know, I know—I notice 

that you—and you are the witness that was called by the—by the 

Democratic party, you know—I mean, Democratic colleague. You 

actually talked about two or three times that justification for this 

is anti-money laundering. 

Mr. LEVITIN. I am sorry, Mr. Chairman. I didn’t understand. 

Mr. BACHUS. You said—you, you know, criticized our attempts to 

hamper the Justice Department’s enforcement of anti-money laundering law and, you know, you actually say that is what they are 

trying to do, prevent anti-money laundering. 

Because that is the justification for this program. Right? 

Mr. LEVITIN. I think that is correct, sir. Operation Choke Point, 

if you look at the actual complaint, that is the—you know, the— 

the—it—the problem that was alleged with Four Oaks Bank was 

a failure to essentially know your customer. With the Bank Secrecy 

Act anti-money laundering—— 

Mr. BACHUS. And that has to do with money laundering. 

Mr. LEVITIN. That is right. And it is important to recognize that, 

when you have an anti-money laundering problem, even if it is 

from, let’s say, a payday lender, that can actually implicate much 

broader things because, if a bank doesn’t know its customer, it 

doesn’t actually know what that transaction is. 

Just because a business says it is a payday lender, it can also 

be, you know, engaged in other business, allowing other transactions to be routed and look like they are payday loans. 

Mr. BACHUS. Right. Yeah. And, you know—and I mention this 

because that is an argument that we are hearing from some of our 

colleagues. 

You know, you say Operation Choke Point is ultimately an antimoney laundering enforcement that requires the banks to take 

their know-your-customer duties seriously. 

And that is—the Justice Department, you know, on one hand, 

has said it is for this reason, but then they said, well, actually, it 

is to prevent money laundering. 

But do—do payday lenders launder a lot of money? Is there any 

evidence of that? 

Mr. LEVITIN. As to actual money laundering, I don’t know of any 

evidence on that. We do know that there is high return rates, however. 

Mr. BACHUS. Well, yeah. But I am talking about—you know, I 

am talking about money—— 

Mr. LEVITIN. And—well, I think it is important that we define 

what we are talking about with money laundering. Money laun-
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dering is not limited to narcotics or terrorism. Money laundering 

is just proceeds of any illegal transaction. 

Mr. BACHUS. Yeah. Right. 

Mr. LEVITIN. And to the extent that you have illegal transactions 

going on in any industry, payday loans or what have you, then, yes, 

there can be a money laundering problem. 

Mr. BACHUS. Are these hundred-dollar loans? But you said there 

is no evidence that the—— 

Mr. LEVITIN. I don’t know of any evidence. I have never investigated this. 

Mr. BACHUS. Yeah. Right. Okay. 

Mr. LEVITIN. I would note, though—— 

Mr. BACHUS. I am sure potential is there for any—— 

Mr. LEVITIN. Of—sure. 

Mr. BACHUS [continuing]. By any industry. I mean, you know, in 

fact, people buy cars. One of the primary ways is they go to a car 

dealership. They buy a very expensive car. Then they turn around 

and they sell it. And they deposit the proceeds and they launder 

it that way. But, you know, car dealerships are—— 

Mr. LEVITIN. There is a particular concern, though, in that some 

payday lenders are also money services businesses and they are 

sometimes engaged in doing international remittances. And that 

raises particular money laundering concerns. 

Mr. BACHUS. I think the—you know, if you are talking about a 

hundred dollars at a time, it is kind of hard to—— 

Mr. LEVITIN. Well, that—but that is the way to do money laundering. It is called smurfing. 

Mr. BACHUS. No. No. Actually—— 

Mr. LEVITIN. You do it in small transactions so you don’t get—— 

Mr. BACHUS. You know, cars are a $10,000 transaction, I think. 

Money laundering, through—you know, when they do drugs to 

money, they are converting—they are not doing it a hundred dollars—— 

Mr. LEVITIN. Actually, I disagree with you on that, sir, because 

banks have—have to file suspicious activity reports for anything 

over $10,000. 

The idea is you keep your—if you want to be a money launderer, 

you keep your transactions small and you don’t put them at 9,999 

because that is also suspicious. You make smaller transactions, not 

necessarily a hundred. 

Mr. BACHUS. No. No. I—— 

Mr. LEVITIN. But you break it up into little pieces—— 

Mr. BACHUS. Maybe 2,000, 3,000. Or you buy—you know, there 

are—people buy appliances and they ship them back—out of the 

country. You know, there is a lot of that. 

But I have seen no—I mean—I have never seen any evidence 

that people are cashing their paychecks—I mean, a paycheck is a— 

that is a—that is not cash. 

They are actually taking a check. And there is no need to moneylaunder that. And they are turning it into cash. They are not turning cash into a check. 

So—but, anyway, I—we are—I have done 7 minutes. We will— 

my colleague will do 7. And then we will turn—I just was pointing 

out—— 
181 

Mr. JOHNSON. Okay. Thank you. 

Professor, you are a professor. And you three gentlemen, Mr. 

Talbott, Mr. Thompson, and Mr. Weinstock, are practicing lawyers. 

Is that correct? 

Mr. TALBOTT. Yes. 

Mr. THOMPSON. Yes. 

Mr. TALBOTT. I am a lobbyist—— 

Mr. JOHNSON. You are a lobbyist. 

Mr. TALBOTT [continuing]. With a law degree. 

Mr. BACHUS. He is government affairs. 

Mr. TALBOTT. I am not apologetic. 

Mr. BACHUS. You are government affairs. 

Mr. JOHNSON. The three of you also have clients; do you not? 

Mr. THOMPSON. Yes. Yes, sir. 

Mr. BACHUS. And, Mr. Thompson with Hunton & Williams—oh. 

I am sorry. 

Mr. Weinstock with Hunton & Williams, you have many clients 

in the financial services industry; do you not? 

Mr. WEINSTOCK. Yes. 

Mr. BACHUS. And how about you, Mr. Thompson? 

Mr. THOMPSON. I do not. In the past, I have represented, but not 

at present. I have some. 

Mr. JOHNSON. And Mr. Talbott? 

Mr. TALBOTT. Members of the association of ETA are payment 

companies. Some are financial institutions, per se. Others are not. 

Mr. JOHNSON. Okay. And—but, now, Mr. Thompson, you have 

done over 50 depositions. Did I hear that earlier? 

Mr. THOMPSON. I think it is several hundred, in fact. But only 

two of Members of Congress, Senator Snowe and Representative 

Meehan back in the McCain-Feingold case. 

Mr. JOHNSON. Okay. And you did that work in connection with 

your job responsibilities where? 

Mr. THOMPSON. At Cooper & Kirk. I have been there since 1996. 

Mr. JOHNSON. And so that law firm does represent clients in the 

financial services industry? 

Mr. THOMPSON. We have. Yes. 

Mr. JOHNSON. And so—and I—and I suppose, in a perfect world, 

a perfect corporate world, a perfect free market corporate world, a 

perfect free market Ayn Rand-style world, there be no regulations 

on banks at all. 

Would you agree with me on that, Mr. Talbott? 

Mr. TALBOTT. Theoretically, if you asked Ayn Rand, I think she 

would answer that question in the positive. 

Mr. JOHNSON. Well, how about you? 

Mr. TALBOTT. I think that there is a need in—for some regulations some places, financial services probably less so than other 

areas. But there is a value to having some regulations. 

Mr. JOHNSON. Mr. Thompson? 

Mr. THOMPSON. My clients are not contesting the validity of any 

of the regulations or—— 

Mr. JOHNSON. No. My question is: Would you agree that that 

would be a perfect world for corporations, to not have any rules or 

regulations—— 

Mr. THOMPSON. No. 
182 

Mr. JOHNSON [continuing]. And they could pretty much self-regulate? 

Mr. THOMPSON. No, Congressman. That—— 

Mr. JOHNSON. Is that the kind of world that we want, Mr. 

Weinstock? 

Mr. WEINSTOCK. I never read the book. So I am not exactly sure 

why a Rand-perfect world would be. But I think what we are all 

saying is what is appropriate is balance in regulation. 

Mr. JOHNSON. Well, now, how can we have reasonable regulations if the banking institutions don’t want to deal with the potential loss of customers because they determine for themselves that 

their reputational risks—that the reputational risks are not worth 

the business and you have to also do more oversight, got to do 

more—the costs of doing business for certain businesses is high because of regulation, and you would prefer to not have to—for your 

clients to not have to incur those costs. And I understand that. 

But where do we draw the line? Where is regulation meaningful 

and reasonable and in the public interest? 

And so that is a fundamental question I think we have to deal 

with as opposed to an incendiary guilty-until-proven-innocent study 

of propriety and legal authority for the Justice Department’s Operation Choke Point. 

I mean, Operation Choke Point has only resulted in one civil action. Subpoenas have been sent out to other institutions. There are 

ongoing investigations. 

But a settlement in a civil case—and we are sitting up here 

wasting, you know, your time bemoaning the fact that your clients 

have to incur costs of doing business. 

I mean, you know, when is the—when do we—who protects the 

consumer, which is the real customer? 

Mr. WEINSTOCK. Can I respond? 

Mr. JOHNSON. Yes. 

Mr. WEINSTOCK. In terms of the level of regulation, as they say 

in East Texas, if you hang the meat too high, the dogs won’t jump. 

And the problem for our client base, which they are community 

banks, they are the lifeblood of their local communities, is that, if 

the level of regulation is such that they have a duty to police all 

of their customers, their scripts—— 

Mr. JOHNSON. Well, shouldn’t that be just a normal cost of business, that you do your due diligence and you make sure that certain benchmarks are met with enhanced scrutiny, like rate of returns in excess of 1.5 percent? 

Isn’t it—I mean, isn’t that the regulations of your industry, Mr. 

Talbott? 

Mr. TALBOTT. Yes. 

Mr. JOHNSON. And so, if—if regulators or the Department of Justice notes some benchmarks that have been met which trigger suspicion, you all seem to be opposed to DOJ following up on that. You 

just want there to not be a loss of the customer—— 

Mr. WEINSTOCK. That is not what we are saying, Congressman. 

Mr. JOHNSON [continuing]. And you don’t want a loss of the cost 

of doing business, and it just seems very Utopian to me. 

Mr. WEINSTOCK. If—in terms of the 11⁄2 percent, that is really a 

red hearing. That is an average based on lots of different NACHA 
183 

transactions. The DOJ disowned the 3 percent, which was just 

mathematically doubling the 11⁄2 percent average. 

NACHA, which is the agency that calculates the averages, never 

indicated that it is an indicator of fraud. The DOJ took it on itself 

and then at this hearing disowned the 3 percent. 

Unquestionably, banks have an obligation to know their customer. Banks are complying with that obligation to know the customer. 

Where this is all insidious is if the level of regulation and the 

level of supervision is such where the bankers don’t believe they 

can ever chin the bar, they can ever jump and catch the meat. 

Then their smart thing to do is to de-risk, cut the customer off. 

And the costs we are talking about are access to the lifeblood of an 

electronic economy. 

Mr. JOHNSON. Yeah. Well—— 

Mr. BACHUS. Actually, we did 7 minutes. So it is 81⁄2. You can 

go ahead, if you have got another question, and then I will—— 

Mr. JOHNSON. I just wanted to ask Professor Levitin did he have 

anything he wanted to say in response to what we have heard. 

Mr. LEVITIN. Again, I would just say that I am not sure that— 

I am not sure I would agree with Mr. Weinstock. 

Certainly for some banks they will decide that it is not worthwhile serving high-risk customers. They just can’t get—that they 

are afraid that their compliance costs are just going to be too high 

to get comfortable with it. 

But we have nearly 7,000 banks. Unless we assume that we have 

a real market failure in the banking industry in this particular 

area, there will be banks that will step up and serve these highrisk clients. 

They will start specializing in it. They are going to do more diligence. It will cost them more. It will cost the clients more. It will 

cost Mr.—and high-risk businesses will have to pay more for access 

to the banking system. 

But that is exactly the way it should be. Parties should bear 

their own risk. If you are imposing costs on the system, you should 

have to internalize them. And I don’t think there is anything wrong 

with that. 

Mr. JOHNSON. Well, I think that would be the way that Ayn 

Rand would want it to be. 

Mr. LEVITIN. I would just add it is not clear to me that markets 

exist except with regulation. If you try and imagine a totally unregulated market, I think that looks like the Mogadishu arms bazaar, and I don’t think that is the way we want our economy to 

operate. 

Mr. BACHUS. Let me start with that. I somewhat—I agree with 

you. I think that the market needs to be regulated. 

That is really why I am just, you know, disturbed about payday 

lenders, short-term lenders, being put out of business. Let me explain why. And I think history is a good teacher. 

Mr. Johnson talks about a perfect world. In a perfect world, there 

will be no payday lenders. But there always have been. In the 

South, do you know who the payday lender was in many cases? 

Mr. LEVITIN. It was often the employer. 
184 

Mr. BACHUS. It was—no. It was—there were some—some occasions where the employer—you are absolutely right. You had the 

company store where people bought things—— 

Mr. LEVITIN. I was thinking of Faulkner, actually. He has got 

Old Man Snopes loaning sawmill workers a dime on Sunday. And 

they are supposed to pay it back with a penny the next week. 

Mr. BACHUS. That is right. 

Mr. LEVITIN. Never asked for the dime back. Just keeps taking 

a penny every week. 

Mr. BACHUS. And I actually had two employers and they—many 

times was a high interest rate. They don’t loan money anymore. I 

mean, I don’t know of any—very few cases. You don’t have a lot 

of company stores. 

What you do have is you have the sheriff in those counties or you 

have a guy that is just a self-appointed guy that stands outside 

the—used to stand outside the gate when people got their paycheck. You know, he—or—you know, he—he was waiting to get his 

money back. During the week, he had loaned at a 50 percent or a 

30 percent. 

A lot of times, though, it was—it was totally unregulated. And 

people got their arms broken. People got their fingers mashed. People got beat up. So we—States wanted it regulated, and they set 

rules. And that is the rules we have today. 

So these payday lenders are—you know, if you—if they go out of 

business, you are going to have the guy at the gate getting his 

money back. And if he doesn’t get his money back, kind of like in 

the—gambling used to be. You know, when you have unregulated 

gambling, people get—people get hurt, people get killed. 

So, really, you shut these down, you are going to have people 

loaning money. And they are going to be unregulated. They are not 

going to answer to anybody. So this isn’t about regulation. It will 

be Mogadishu again, like you said, I mean, about something else. 

I just say consider that. And you talk to anyone that ran a plant 

in the South, they will tell you there was always a payday lender. 

And—you know, and a lot of times you share for the probate judge. 

That is how they made their money. There were other things 

that—they used to make their money on illegal whiskey by protecting some people. They were in the protection business. 

Mr. LEVITIN. Mr. Chairman, I think it is important to note that 

payday loans basically don’t make money absent customers get 

stuck in a—in a debt trap. 

Let me illustrate. Online payday lenders buy leads. If you go to 

a Web site looking for a payday loan, that is actually a lead-generator’s Web site—— 

Mr. BACHUS. No. I understand. 

Mr. LEVITIN [continuing]. Get auctioned off. 

Mr. BACHUS. Professor, what I am saying, you know, you—in a 

perfect world, I would never argue with you that, you know, it— 

but I would tell you there will always be a payday lender, and it 

will be unregulated or regulated. Those are our two choices. 

You know, one thing you do is you talk about Congress should 

not be using its oversight power to subsidize these businesses. You 

say that twice. 

Mr. LEVITIN. That is correct. 
185 

Mr. BACHUS. And you say payday lenders, online gun shops, escort services, online gambling parlors—now, they are all illegal. 

That is flat out prohibited. 

Mr. LEVITIN. Actually, I am not sure that any of those are, per 

se, illegal. There is a small sliver of online gambling—— 

Mr. BACHUS. Yeah. The wire—— 

Mr. LEVITIN. Similarly, escort services, if they are very narrowly 

only companionship—— 

Mr. BACHUS. Yeah. But I will just say most of your gambling online. You know, it is hard to stop. A lot of them are overseas. But 

purveyors of drug paraphernalia and racist material, pornographers that serve no clear public service. 

But, you know, you—when you get into saying that, you are 

equating short-term lenders. I mean, you are making a judgment 

there that—you are equating them to drug purveyors or drug paraphernalia. I know you don’t intend do that. 

Mr. LEVITIN. No. No. No. Actually, I think for—— 

Mr. BACHUS. Or online gun shops. 

Mr. LEVITIN [continuing]. For the purposes of what I am saying, 

I very much intend—intend that because—— 

Mr. BACHUS. Okay. 

Mr. LEVITIN [continuing]. In terms of whether these are high-risk 

merchants or not, from a bank’s perspective, it doesn’t really matter what the ultimate transaction is. It is how much risk. 

And the porn Web site and the payday lender, if they are high 

risk, they are high risk. It doesn’t—the specifics of the industry 

don’t matter. It is high risk. 

Mr. BACHUS. But, you know, I think—when you are talking 

about a criminal investigation by the Justice Department, I think 

it matters whether it is a legitimate business or a fraudulent business. That is my point. 

Mr. Thompson, FIRREA passed in 1989. It was never used until 

now against payment processors, was it? 

Mr. THOMPSON. Mr. Chairman, I am not an expert on that aspect 

of FIRREA, but I believe you are correct. 

Mr. BACHUS. Yeah. 

Mr. Talbott, do you know. 

Mr. TALBOTT. Same answer. I think that is right. 

Mr. BACHUS. Okay. I think that concludes our hearing today. I 

appreciate all our witnesses. Concludes the hearing. 

Did you have another question. 

Mr. JOHNSON. No, sir. I do not, Mr. Chairman. 

I just want to, for the record, thank the Chairman for his willingness to have these kinds of hearings that are not so structured and 

that—it prevents us from getting down into the meat of the matter. 

And so I want to thank you for—— 

Mr. BACHUS. Well, as you know, I am retiring after 22 years and 

I was a trial lawyer before I got here. And I don’t think I could 

have ever tried a case on a 5-minute rule or even made a point, 

and it—the structure doesn’t really lend itself. 

And not in this particular hearing, but in some hearings it 

causes the witness to filibuster by talking about anything but answering the questions. But then it also—because Members rush 
186 

and I—I really hate to see Members do this, but they interrupt witnesses. 

If the witness wants to give a 2-minute response, they want a 

‘‘yes’’ or ‘‘no’’ answer. And that is not always possible. You want to 

explain yourself. 

So you get—you really don’t get a complete picture. You don’t— 

you don’t get—and then you have another witness wants to come 

in on what this witness said, which is good. 

But we—so the 5-minute rule I wish we would—would do something about that in certain cases. But I am sure a freshman sitting 

down here wouldn’t want that. But we could always start at the 

bottom every other time. 

This concludes today’s hearing. As I said, thank you for all our 

witnesses. 

Without objection, all Members will have 5 legislative days to 

submit additional written questions for witnesses or additional materials for the record. 

This hearing is adjourned. 

[Whereupon, at 1:18 p.m., the Subcommittee was adjourned.] 
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